T-bill at 3.998% just shy of 3.7% inflation. Will they push it further down below inflation. Both auctions this week oversubscribed 8.4 billion and 18.7 billion for T-bills and T-bonds. are banks that liquid? I don't think so, let's see how much omo support they'll receive from CBK next week monday.

Can T-bill go lower than interbank/reverse repo rate, that would mean a subsidy of 0%. Why are banks putting money in T-bills? These are not productive savings being lent from the public this is simply bank credit and we know how easy that is to do. Banks are not taking the risk on an economy that is expected to grow by 4.5% this year, doesn't make much sense.

See the auction results this week:

http://www.centralbank.g...ills/manualresults.aspx
http://www.centralbank.g...bonds/manualresults.aspx

tbill can go as low as cbk want it...in 03 we hit 0.95pct...cbk are hell bent to drive lending rates lower

the floor is zero i gues..ama 0.95 from past trends...i just dont think theres that much room for lower rates..unless we see sustained +7pct growth i dont see wher the monetary expansion to cause such over supply wud come from.....lakini cbk cud do anytg...they can cut the tendor amounts on tbills stay out of reverse repo-heck even do repos...etc..basically force banks to lend

Excellent article in the BD on bond prices and the upcoming IFRB issue. Highlights of the article and some comments:

The Sh31 billion nine-year bond, which comes with a three per cent discount for early exit, marked yet another signal of the CBK’s preference for lower lending rates and is expected to become the benchmark for upcoming corporate bond issues in the coming months.

Just a year ago 9 year paper was going at 11.6% and now it's 6.0%. Good signal for lending rates (and corporate bonds) but also good for debt service (it's 31 billion at 6.0% and not 11.6%-tax free, so interest is lower)

These low yields for short and medium term securities are expected to make lending to government less attractive for commercial banks intensify the drive for private sector and household lending where the returns are much higher.

Low yield to make govt securities less attractive for commercial banks. Crowding out effect. But are some banks still reluctant to lend to ordinary borrowers. Take SCBK and its cosmetic efforts to prop up its capital base; By Q1 of 2010 it was lending more to govt than ordinary folks (deja vu of 2003). In that case it's not buying bonds for liquidity or returns, but to keep it's capital above board. same for kcb.

Should the ongoing decline in subscription rate continue, analysts said the CBK will have to pump more money into the market or adjust its pricing upwards triggering a rise in the pricing of private sector bonds, a rise in bank deposits rates and ultimately higher lending rates.
“The CBK might need to pump liquidity into the market to ensure that this offer is fully taken up,” said Resa Imbuye, the head of research at Co-op Trust Investment Services Ltd.

CBK already has begun pumping money in and raised the 182 T-bill (a rate using as a benchmark for some commercial papers). A rise in deposit rates would cause an equivalent rise in lending rates (I recall my last monthly bank statement from CFC Stanbic Bank, "we are proud to inform you that the group lending rates have dropped 1% and accordingly the saving rate has also been dropped by 1%").

A decline in cost of funds (deposit rates) has been the main driver of the recent cuts in lending rates contrary to the common belief that they are responding to the Central Bank’s signal as expressed through the CBR cuts.

Read more:

http://www.businessdaily...30/-/7jhdkc/-/index.html

Interesting article in the BD today about govt auctions and cost of funds. The short term rates were brought down as a disincentive to banks so as to encourage a lowering of lending rates. But why did they floor at the rate they did (1.7%)?

Perhaps inflation has something to do with it. But not likely. The correlation is good but all short term rates offer negative returns but are still being subscribed. Perhaps the subject of the article, the cost of funds, holds the answer. Why lend to govt at any rate below the interbank, there' no profit incentive, opportunity cost.

Read more:
http://www.businessdaily.../-/10lehjn/-/index.html

China just dumped record amounts of U.S. Treasuries

http://www.thedailycrux....t/5530/US_Treasuries/eml