Banks cut hold on Kenya's domestic debt as yields fall

Commercial banks have cut marginally their hold onto Kenya's 18 billion U.S. dollars domestic debt as yields on government securities fall, new data showed Wednesday.

Their hold onto the debt peaked at 55 percent at the end of September, according to the Central Bank of Kenya (CBK).

During the month, a law to cap interest rates was implemented, making the banks to scramble to buy Treasury bills and bonds to make up for expected loss of income.

However, by the end of last month, the hold had dropped by 0.8 percentage point to 54.2 percent, with analysts citing two reasons for the decline.

First is the falling yields on the securities and second is the financial institutions having weathered the shocks created by the capping of loan charges.

Interest rate for the benchmark 91-day Treasury bill currently stands at 8 percent, having reversed last week a negative trend that started September and saw the yield fall to 7.7 percent.

The low yield affected subscription of the papers, which in the past weeks had been more than double the value of securities put on sale, thanks to commercial banks.

Last week, the Central Bank put on sale 91-day Treasury bills worth 39 million dollars and received bids worth a similar amount. It accepted bids worth 36 million dollars. Similarly, subscription for the 364-day paper worth 59 million dollars stood at 53 million dollars.

According to the CBK data, as banks cut hold on the domestic debt, while individual investors and parastatals have been raising theirs.

"The cut by banks I believe is short term because interest rates have once again begun to rise. Besides, the government plans to raise an additional 584 million dollars from the domestic market this fiscal year making the total targeted amount to 2.9 billion dollars. This will make banks scramble for the securities," said Henry Wandera, an economics lecturer based in Nairobi. Endit