Kenya 30, 5-year T-bond yields to jump after discount rate

NAIROBI: Yields on Kenya's 30-year and five-year Treasury bonds are expected to head higher at next week's sale in step with a sharp jump in the short end of the curve after the central bank moved to tighten rules for banks borrowing from its overnight window.

Last Friday, Central Bank of Kenya unveiled a new method of computing the rate it charges banks borrowing from it as a last resort, in line with a tightening monetary stance, in the face of a sharp weakening of the shilling and high inflation.

Daily moves have since sent the discount rate to 17.89 percent on Thursday from 6.25 percent last Friday and the interbank overnight rate to 16.93 percent on Thursday from Friday's 8.34 percent.

On Friday central bank said would no longer display its discount window rate as the rate did not have all the information needed to drive the next day's trading, it said in a statement on its website, a week after tightening its overnight lending rules.

Central bank is scheduled to auction the two reopened bonds next Wednesday. The 30-year bond is trading at around 15.50 percent in the secondary market, while the five-year bond is trading at around 12.65 percent.

"If you need a return on these papers, you need to bid at very high rates which are definitely out of the yield curve completely for it to make sense," said a trader with a commercial bank.

Fixed income traders said they expected the yield on the 30-year bond to jump to 20-25 percent, while that of the five-year bond will likely head to 13-15.50 percent.

Commercial banks were expected to largely stay away from the auction, thanks to the ensuing shilling liquidity squeeze after the central bank's move, that has made short-term lending lucrative for those with the liquidity.

"The market is still experiencing a liquidity squeeze ... The new rules have actually pushed the cost of whatever liquidity is available in the system extremely high," said Peter Njuguna, head of fixed income and money markets at Kenya Commercial Bank.

"Probably a lot of people might opt not to lock in their liquidity there for long term, especially commercial banks. But I see the traditional fund managers who have liabilities and they are looking to match (participating in auction)."

Fixed income traders said inflation, which stands at 15.53 percent year-on-year as of July, was also a concern, and this was expected to add to the upward pressure on yields.

"With food prices, and with the energy costs which will also come in, inflation will always be a big concern going forward," said a second trader at another commercial bank who did not wish to be named.

Copyright Reuters, 2011