Slowing inflation to send Kenya, Uganda yields lower

 

 

Yields on Kenyan Treasury bills are expected to ease further in the coming week after inflation slowed for a third month and as investors, anticipating a rate cut by the central bank, rush to lock in high rates.

 

Year-on-year inflation in east Africa's largest economy fell to a lower-than-expected 16.7 percent in February from 18.3 percent in January, which analysts said could give the central bank room to start easing monetary policy.

 

Next week the regulator, which is scheduled to hold a policy meeting on Tuesday, will auction 91-day, 182-day and 364-day Treasury bills worth a total of 10 billion shillings ($120.1 million).

 

"Investors expected inflation to come down, and it did quite significantly. Yields could fall even further if the central bank decides to cut its rate," said Mercy Njoroge, a trader at Tsavo Securities.

 

This week, the weighted average yield on 182-day bills eased to 18.76 percent from 19.25 percent last week, while the 91-day paper came in at 18.75 percent, down from 19.15 percent previously. Both sales were oversubscribed.

 

Traders said they expected the 364-day bills yield to settle within the 18.4-18.8 percent range next week, reflecting a slight premium due to liquidity issues over the one-year Treasury bond sold last month with a coupon of 18.03 percent.

 

They also said lower inflation was likely to spur investors towards long-term bonds as real return on the papers move into the positive territory.

 

"With lower inflation, the 30-year bond is finally yielding a real return meaning we should be able to see the long end of the yield curve open up," said Alex Muiruri, a trader at Africa Alliance Investment Bank.

 

Ugandan Treasury bill yields are expected to edge lower at an auction next week after the central bank cut its key lending rate in anticipation of a continued decline in inflation.

 

The Bank of Uganda will offer 110 billion shillings ($45.97 million) in 91-, 182- and 364-day Treasury bills next Wednesday.

 

On Thursday, the bank cut its Central Bank Rate by one percentage point to 21 percent citing a belief that inflation would fall to single digits by the end of the year.

 

"The rate cut will play a big role in next week's auction," said Faisal Bukenya, head of market making at Barclays Bank Uganda. "We anticipate yields in all tenors to come off."

 

Traders expect firm demand from local investors as those from offshore search for more attractive yields in other markets such as Kenya.

 

"I anticipate a bit of interest from offshore but the bulk will be local," said Bukenya. "When rates were above 20 (percent) they put in quite big amounts. Their appetite is waning slowly."

 

Another trader said although there was still interest from overseas he expected local banks to be the most active participants.

 

"Ugandan assets are probably not looking as attractive as they did a couple of months ago when inflation was in the region of 25 percent," he said.

 

The trader said the auction was likely to be oversubscribed, with the 1-year bill receiving the most demand.

 

A sale of 3- and 5-year bonds this week was heavily oversubscribed, with the Bank of Uganda receiving bids worth more than five times the 100 billion shillings on offer.

 

The yield on 3-year paper fell to 15.95 percent from 21.09 percent at an auction in January, while that for 5-year paper declined to 15.99 percent, from 17.96 percent previously.

 

 

Yields on Nigerian debt instruments are likely to drop slightly next week due to growing appetite from foreign investors and an expected slow down in monetary tightening by the central bank.

 

The International Monetary Fund (IMF) said this week that Nigeria should halt further tightening measures and focus on a clear inflation objective. The central bank held its benchmark interest rate at 12 percent for the second time in a row last month.

 

Nigeria sold 111 billion naira ($704.09 million) in 2019 and 2022 bonds at an auction this week, with the 2019 bonds issued at a marginal rate of 16.16 percent, higher than the 16 percent they yielded at the previous auction in January. The 2022 instruments were sold at 15.89 percent compared with 16.39 percent previously.

 

Traders said the result spurred profit taking at the secondary market by dealers.

 

"People actually expected that strong demand for the bonds would naturally translate to lower yields at the auction, but the outcome of the auction spurred a rash of profit taking in the market on Thursday," one dealer said.

 

Dealers said yields remained flat on all tenors at the secondary market on Friday and will either trade sideways next week or drop off slightly.

 

"We also expect strong demand for treasury bills at next week's auction to drive down yields across tenors, especially the one-year paper," another dealer said.