LONDON, May 11 (Reuters) - Kenyan Treasury bill yields tumbled at auctions this week and further declines are expected after inflation in east Africa’s largest economy fell in April for the fifth consecutive month.
Little change is expected at next week’s T-bill auction in Uganda, where inflation risks remain a concern.
Increased liquidity and expectations of falling inflation are likely to push Kenyan debt yields lower next week when the central bank sells 4 billion shillings ($48 million) of 91-day and 182-day Treasury bills.
“People have been redeeming but not investing it back, increasing liquidity in the market. The central bank is not under pressure to take all bids like before,” said one trader.
The Central Bank of Kenya, which scaled down its domestic borrowing target for the 2011/12 fiscal year after it sealed a $600 million syndicate loan financing, is expected to keep rejecting most bids to bring down funding costs.
At an oversubscribed auction this week, the yield on 364-day paper tumbled to 12.4 percent from 16.9 percent in April, while the 182-day bill came in at 13.1 percent, down from 14.8 percent the previous week.
The yield on the benchmark 91-day bill plunged 200 basis points to 11.4 percent on Thursday.
“Investor appetite to lock in the current relatively high interest levels remains strong,” said mercy Njoroge, a trader at Tsavo Securities.
“Inflation is expected to fall in May, piling downward pressure on the rates.”
Inflation in the east African nation fell for the fifth straight month to 13.1 percent in April, from 15.6 percent in March.
Ugandan Treasury bill yields are likely to remain around current levels at an auction next week on expectations that interest rates will be kept unchanged until the second half of the year.
The Bank of Uganda will offer 120 billion shillings ($48.39 million) in 91-, 182- and 364-day Treasury bills next Wednesday. At a sale last week the bills yielded 18.02 percent, 20.04 percent and 20.49 percent respectively.
Traders said they expected little movement after the central bank held its key lending rate at 21 percent last week citing continued risks to inflation posed by rising food prices.
“The fact that the central bank kept the CBR rate for the month of May is one indication that interest rates will not be coming off anytime soon,” said one trader.
“General market sentiment is that rates, especially on the short end, will continue to remain at around that 20 percent area. Secondary market activity has been in that region.”
The auction is likely to be oversubscribed, the trader said, forecasting a 150 percent subscription rate. Offshore players would probably account for about 20 percent of the auction size, he added.
The central bank’s attempts to mop up excess liquidity through repos in the past week is also likely to keep yields high, said Ahmed Kalule, financial markets dealer at Bank of Africa.
“Their main issue is to have a strong shilling,” he said. “They’ve been trying to mop up some liquidity so that these rates can still be interesting for offshores to come in.”
Yields on Nigerian debt are set to drop further at a bond auction next week, with sustained strong demand expected from both local and offshore investors.
Nigeria plans to sell 70 billion naira ($444 million) of sovereign bonds ranging between 5 and 10 years on May 16, the Debt Management Office said on Thursday.
The debt office of Africa’s second biggest economy will sell 35 billion naira each in 5- and 10-year paper.
“We see yields declining further at the next week’s auction as demand for local debt instruments remain strong,” one dealer said.
Treasury bill yields fell further at an auction this week, reflecting persistent strong demand for the instruments.
The central bank said on Friday it had sold 147.05 billion naira in Treasury bills.
The yield on 3-month paper fell to 13.19 percent, from 13.84 percent at an auction last month, while that for 6-month paper declined to 13.87 percent from 14.59 percent previously. The 1-year bill yielded 13.94 percent, down from 14.64 percent. ($1 = 83.32 Kenyan shillings) ($1 = 2480 Ugandan shillings) ($1 = 157.6 naira) (Reporting by Kevin Mwanza, Tosin Sulaiman and Oludare Mayowa; Editing by Ed Cropley)