Bloomberg News

Kenya Yields Hit 5-Year High at Auction as Inflation Climbs

June 09, 2011

(Updates with analyst’s comment in third paragraph.)

June 9 (Bloomberg) -- Kenya’s yield on one-year Treasury bills climbed to the highest in at least five years at a sale where the central bank accepted only 3.2 percent of bids as investors demand higher returns amid surging inflation.

The yield on the 364-day debt rose to 10.249 percent, the Nairobi-based Central Bank of Kenya said in an e-mailed statement yesterday. That’s the highest since at least March 2006, when Bloomberg began keeping records of the data. The yield advanced from 6.772 percent at the previous auction. The bank, which had offered 5 billion shillings ($57 million) of the debt, accepted 281 million shillings of bids.

“Investors are bidding aggressively as they realize the current fiscal year is coming to an end and the central bank may be tempted to take up all bids to meet the government financial need,” Ronald Olembo, a dealer at Nairobi-based CfC Stanbic Bank Ltd., said in a phone interview today.

The government faces “huge demand” for additional spending to fund implementation of a constitution enacted in August, and to help cope with drought in an economy that is about 25 percent reliant on agricultural production, the finance ministry said in its March 23 budget policy statement.

Government borrowing rose to 125 billion shillings in the current fiscal year, from an original estimate of 105 billion shillings, to fund those programs, the ministry said.

Inflation, Costs

Kenyan government borrowing costs are increasing as the East African nation’s inflation rate jumped to a 25-month high of 13 percent in May. Price growth is expected to advance further this year as dry weather curbs agricultural production, central bank Governor Njuguna Ndung’u said on June 6.

“It is instructive to note that major investors in this market have pushed the rates to levels that make domestic debt expensive,” the central bank said. “The government therefore cannot contract debt at such levels.”

Kenya’s monetary policy committee raised the benchmark interest rate by a quarter percentage point to 6.25 percent and the cash reserve ratio by the same amount to 4.75 percent, central bank said on May 31.

“The decision to take less than it had offered is informed by the market seeking higher returns of up to 12 percent, which would have distorted the long end of the yield curve,” Ann Musyoka, a bond dealer at Nairobi-based Tsavo Securities Ltd., said in a phone interview.

--Editors: Ana Monteiro, Linda Shen

To contact the reporter on this story: Johnstone Ole Turana in Nairobi at jturana@bloomberg.net

To contact the editor responsible for this story: Antony Sguazzin at asguazzin@bloomberg.net


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