In last week’s auctions of government securities at the Central Bank of Kenya (CBK) the yields fell on all short term securities on offer; the 91 day and the 182 day Treasury bills. The yield on the 91 day bill stood at 9.865% as compared to the 10.075% seen at the previous auction. The yield on the 182 day bill stood at 10.915% down from 12.078% at the previous auction. Over the last month or so, the yields have been steadily decreasing. This has put downward pressure on the Kenya Shilling and has also caused the domestic securities to lose appeal among foreign investors.

The reduction in foreign investment can be proven by the lower subscription rates observed at recent auctions. On Wednesday’s auction, the 91 day bill had a subscription rate of 64%. On Thursday’s auction, the 182 day bill had a subscription rate of 22%. This was the first time in the history of the pesatalk that we have observed an auction where the CBK has been unable to attract enough bids to meet even the targeted amount. Consequently, foreign investors are abandoning Kenya in search of higher returns in markets such as Uganda where the yields stand at between 18% and 20%.

What causes yields to move up and down?

Many factors may affect Treasury bill interest rates in general, as well as rates for specific issues of Treasury securities, in particular. Here are several factors you might want to consider:

• Demand for risk-free fixed-income securities in general—For example, a "flight to safety" caused by concerns about liquidity risk in other financial markets may cause investors to shift to T-bills to avoid risk.
• Supply of T-bills by the government.
• Economic conditions may influence rates--for example, T-bill rates typically rise during periods of business expansion and fall during recessions.
• Monetary policy actions by the CBK actions that affect the CBR will influence interest rates for other close substitutes, including short-term T-bills.
• Inflation and inflation expectations also are factors in determining interest rates--for example, periods of relatively high (low) rates of inflation usually are associated with relatively high (low) interest rates on T-bills