By James Muliro
The financial crisis government is experiencing has pushed it to the limit, forcing it to pick up funds from the markets at very lofty rates.
Coupled with a high appetite of borrowing from the domestic market, interest rates on Treasury bills have risen to over 20% and are set to remain above this level at least in the coming few weeks. This is both good and bad news for investors and the government.
The bad news is that commercial banks, who are the biggest investors in government securities due to their high returns and relative safety compared to lending in the market will be quick to lend money to the government for the enviable returns. As a result, they will shun borrowers whom they consider high risk.
Alternatively, commercial banks are already raising the cost of loans to their borrowers to be in line with the prevailing rates on the short term Treasury bill in the domestic market.
While this will definitely lock out many potential borrowers from the credit market, investors with some money to spare can put their funds in government securities for the high returns they are currently offering.
If you have some money set aside and you don’t know where to invest it right now, you can consider putting it in the government securities. With the prevailing high interest rates and government’s hunger for funds in the market, it is the right time to invest your money in Treasury bills.
The return on the 364-day bill is in the neighbourhood of 20%, a handsome return by all standards. This means that if you invest say Sh500, 000 you will get Sh100, 000 as your return. Minus 15% withholding tax, you are left with Sh85%. You will of course get the principal amount back, which you may invest in another treasury bill should the rates remain handsome.
According to Old Mutual analyst Eric Munywoki, investors should now target the short-term government securities, which provide a good investment opportunity right now considering the high rates they are offering.
“But, while the Treasury bills may offer a good investment right now, it is also a challenge to the government because the question is, for how long will the government pick bids at high rates?” Munywoki said.
In the week ending Friday October 16, 2015, the average yield on the 91-day T-bill stood at 22.133% while the 182-day and 364-day ones stood at 21.84% and 21.882% respectively.
And, while investors should focus on the short-term government securities, the uncertainty in this market means that the high rates the government is offering its lenders may be short lived.
“We maintain our view that investors should be biased towards short-term fixed income instruments due to the uncertainty of the rate environment,” said Nairobi-based Cytonn Investments.
Foreign investors are particularly excited about such high rates. Since interest rates started going up, the shilling has received good support due to inflows of the dollar seeking high returns on government securities relative to very low rates offered in most advanced countries.
“On the Treasury bills, they will continue to gain consistently in terms of the (weighted) average yields … stabilising at levels of around 22, 23 percent. It’s nearing the top,” a fixed income trader at one brokerage house told Reuters last month.
The downside to the high interest rates is that commercial banks are not only passing the lofty cost of loans to their customers but are also reluctant to lend money to higher risk borrowers as they can now find solace in the safety of government securities.
