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LONDON: Kenyan Treasury bill yields are likely to fall to single digits for the first time since September at an auction next week, while healthy demand is expected at Zambia's first bond auction in two months on Thursday.

KENYA

Yields on Kenyan Treasury bills are set to fall into single digits at an auction next week, a level last seen in September, dragged down by high demand and lower inflation.

Rates at the short end of the curve have fallen by about 300 basis points at auctions in the past two weeks as a build-up in liquidity from debt redemptions fuelled demand.

The Central Bank of Kenya is due to auction 2 billion shillings ($23.7 million)of 182-day bills on Wednesday and 2 billion shillings of 91-day bills on Thursday.

The bank is also offering a new 5-year bond worth 3 billion shillings with bids closing on Tuesday. Traders are expecting heavy demand, mainly from commercial banks, to bring 5-year primary market yields down to about 10.5 percent from 12.5 percent at the last sale in August.

"We're witnessing a correction along all debt classes. I'm seeing yields tumble into the single digits we saw before central bank hiked rates," said Brian Mutunga, a trader at Standard Investment Bank.

Yields soared in the last quarter of 2011 after policymakers tightened liquidity aggressively by hiking the benchmark central bank rate (CBR) to 18 percent in December to stem rising inflation and stabilise the shilling.

The central bank has held the CBR steady for five consecutive months.

Inflation has since edged down for five straight months to 13.1 percent in April and is expected to fall further in coming months keeping real returns on debt investments positive.

At this week's auction, yields on 91-day Treasury bills fell 131 basis points to 10.08 percent, while those on the 182-day bills came in 100 basis points lower at 12.08 percent. Both were oversubscribed.

"Guys are expecting inflation to come in much lower in May, so they want to lock in these high rates," said Mercy Njoroge, a trader at Tsavo Investment Bank.

ZAMBIA

Strong demand is expected when Zambia offers 600 billion kwacha ($115 million) in bonds next week in its first sale since deciding to hold bond auctions quarterly instead of monthly.

The Bank of Zambia will sell bonds in six different tenors, ranging from two to 15 years, on Thursday. Last month, the bank said it would revise the frequency of bond auctions in order to boost the secondary market.

The pent-up demand and excess liquidity of close to 1 trillion kwacha would be likely to result in a well-bid auction, one trader said.

"Everybody knows after this the next auction will be three months down the line," he said. "Most pension funds and banks that want to invest will be waiting to get a piece of it and avoid waiting for another three months."

The trader said the 2-, 3- and 5-year bonds were likely to be oversubscribed, while interest in the 7-, 10- and 15-year instruments would be more muted. He added that the yield on the 2-year bond was likely to come down, given investors' preference for short-term paper, while those on the other securities would inch up.

Yields fell across all tenors at a Treasury bill auction this week, with the 91- and 182-day bills yielding 6.5 percent and 9.31 percent respectively, from 6.81 percent and 9.97 percent at the previous sale. Rates on the 273- and 364-day bills stood at 10.37 percent and 11.34 percent, from 11 percent and 11.97 percent previously.

UGANDA

An auction of 2- and 5-year bonds in Uganda next week is likely to be fully subscribed but limited foreign interest is expected as offshore investors shun risky assets amid deepening gloom in the euro zone.

Traders said local investors would take up most of the auction, in which the Bank of Uganda will offer 50 billion shillings ($20 million) in each tenor, and yields were likely to drop.

"I'm expecting the auction to be fully subscribed," said one trader. "I think it's going to be mainly local investors. Fund managers and the pension fund sector will be pretty aggressive. I think the yield on both tenors will probably come off."

"I think offshore investors will probably stay out until the European situation is a little bit clearer," he said. "I don't think they will be adding on any emerging market risk at the moment."

The results of a this week's Treasury bill auction were mixed, with yields falling only on the 1-year instrument to 20.04 percent, from 20.49 percent at the last auction.

Yields on the 91- and 182-day bills rose to 18.7 percent and 20.36 percent respectively, from 18.02 percent and 20.04 percent previously.

NIGERIA

Yields on Nigerian bonds are seen trending up in the coming week after inflation edged up in April, putting some investors on edge ahead of next week's Monetary Policy Committee (MPC) meeting.

"Yields on local debt are inching up across the board this week because of the higher-than-expected inflation figure and gradual exit of offshore investors from the market on concern of depreciation in the naira," one dealer said.

Traders said although they expect the central bank to hold its benchmark interest rate at 12 percent, the regulator could tighten liquidity using other instruments to address rising inflation and a weaker naira.

Nigeria's central bank will hold its rate setting-meetings next Tuesday.

Inflation rose to 12.9 percent year-on-year in April, data from the National Bureau of Statistics showed on Tuesday.

Nigeria sold 70 billion naira ($440.67 million worth of 5-and 10-year bonds maturing in 2017 and 2022 at a monthly auction on Wednesday, the Debt Management Office (DMO) said.

The marginal rate on the 2017 bond was 15.25 percent, compared with 15.1 percent at the last auction in April, while the 2022 paper was sold at a rate of 15.45 percent, against 15.47 percent previously.

Copyright Reuters, 2012