T-bills rates up as investors seek cushion from inflation

The landscape for government borrowing is undergoing a significant shift as investors demand higher compensation to mitigate the impact of rising inflation. This trend is driving up returns on Treasury bills and bonds, creating a more challenging environment for the government’s fiscal strategy.

Recent data underscores this movement: the interest rate on the 91-day Treasury bill has climbed to 8.3865 percent, up from 7.4261 percent at the end of March. Similarly, the 10-year bond yield has risen to 9.5 percent from 8.85 percent on April 21.

Did You Know? Investor preference has shifted aggressively toward the 91-day Treasury bill, with bids climbing to Sh15.8 billion last week compared to just Sh7.3 billion previously, as market participants seek to avoid locking capital into longer-dated instruments during a period of rising rates.

Market Volatility and Equities

The Nairobi Securities Exchange (NSE) has felt the brunt of these changes. As investors pivot toward the perceived safety of government debt and fixed deposits, the equities market has lost its two-year status as the top-performing asset class. Three-quarters of counters at the bourse have recorded a drop in share prices, contributing to an overall 1.3 percent decline for the month.

This volatility is largely attributed to global geopolitical tensions, specifically the US-Israel-Iran conflict, which has fueled a spike in global fuel prices and increased inflationary pressures. Analysts at Sterling Capital suggest that interest rates may have bottomed out and could continue to trend upwards as these uncertainties persist.

Expert Insight: The current market shift reflects a classic “flight to quality” behavior, where capital moves away from equities toward fixed-income assets to hedge against macroeconomic instability. For the Treasury, this complicates the effort to secure nearly Sh1 trillion in net domestic borrowing, as the cost of debt is rising just as the government prepares to tap into bank liquidity.

Future Implications for Borrowing

The upward trajectory of yields is likely to influence the government’s ability to borrow cheaply. With investors demanding higher premiums, the Treasury faces the prospect of increased borrowing costs as it prepares for its upcoming domestic debt requirements.

Nairobi Securities Exchange: 2022 mid-year market review

Looking ahead, bond yields are expected to maintain an inverse relationship with prices. As Churchill Ogutu, Head of Research at Capital A Investment Bank, noted, investors are likely to reduce activity in secondary bond trades to avoid holding portfolios that could lose value in a rising-rate environment. The market may see continued pressure on bond prices as yields search for a new equilibrium.

Frequently Asked Questions

Why are Treasury bill and bond yields rising?
Yields are increasing primarily due to rising inflation and geopolitical tensions, specifically the US-Israel-Iran conflict, which has pushed global fuel prices higher and prompted investors to seek higher compensation for their capital.

How is this affecting the Nairobi Securities Exchange?
The bourse is experiencing a downturn, with three-quarters of counters recording share price drops and an overall monthly decline of 1.3 percent, as investors shift their assets toward less risky government securities and fixed deposits.

What is the outlook for government borrowing?
The government may face higher borrowing costs as it attempts to raise nearly Sh1 trillion in net domestic debt. Recent auction results show that investors are demanding higher yields, frequently surpassing analysts’ expectations.

How do you anticipate these shifting interest rates will influence your personal investment strategy in the coming months?