Yesterday the Central Bank of Kenya (CBK) offered 182 day Treasury Bills worth KES 2 billion and a two year Treasury bond worth KES 5 billion.

For the bill, the CBK received bids worth KES 2.74 billion representing a subscription of 137% and accepted bids amounting to KES 2.73 billion. The weighted average rate stood at 16.623%, 0.015% lower than the rate observed at last week’s auction.

For the two year bond, the CBK received bids worth KES 27.7 billion. This represents a staggering subscription of 554%. The bank accepted bids amounting to KES 6.47 billion. The weighted average rate stood at 13.826%, this is much lower than the 22.844% observed at the last auction of a Treasury bond in November 2011.

The yields on government securities have been steadily increasing since last year in response to CBK monetary policy to stabilise the shilling and bring down inflation.

The abnormally high subscription rate on the bond can be attributed to investor expectations that yields on securities will start to decline as the inflation rate falls. This fall would be in line with the CBK’s monetary policy and investors see the bond as a final opportunity to benefit from high rates before they fall.

Next week the CBK will auction 91 and 182 day bills worth KES 2 billion each. This is in line with their desire to control money supply, liquidity and inflation as the government’s fiscal year draws to an end in June. The CBK also announced that they will auction another two year bond in May and the yield on that bond is expected to be lower than the 13.826% observed yesterday.

It is also worth mentioning that the Monetary Policy Committee (MPC) of the CBK is planning to meet on the 3rd of May. The MPC of the Bank sets the rate of interest at which the Central Bank charge on loans to commercial banks. This rate referred to as the Central Bank Rate (CBR). The rate signals the monetary policy stance of the Bank and we will see whether the Central Bank Rate will be maintained at 18% or not.