Oversubscription of Treasury Bills
Kenya’s appetite for Treasury bills is soaring. At the most recent auction held by the Central Bank of Kenya (CBK), investors placed bids worth KSh 38.8 billion against an advertised amount of KSh 24.0 billion, translating into a performance rate of 161.5%.
The 364-day Treasury bill was the standout performer. While the government had offered KSh 10 billion, bids reached KSh 23.1 billion, representing an oversubscription of more than 231%. The 91-day and 182-day papers also attracted healthy demand, though yields on these shorter maturities continue to edge down as monetary policy eases.
This surge underscores investors’ determination to lock in relatively attractive yields before further reductions are announced.
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The Role of Monetary Policy
In August 2025, the CBK’s Monetary Policy Committee cut the Central Bank Rate (CBR) to 9.50%, its seventh consecutive reduction. Inflation remains moderate at around 4.1% year-on-year, well within the CBK’s 2.5–7.5% target band, giving policymakers room to loosen monetary conditions.
The move signals the regulator’s intent to stimulate lending and spur private sector activity. But investors see the writing on the wall: yields on government securities are likely to fall further in the coming months. That expectation explains the heavy shift into the 364-day paper.
Why the 364-Day Bill is in Demand
Several factors are pulling investors toward the longer tenor:
- Rate expectations: With the CBR declining, future T-bill yields will follow. The 364-day note offers a chance to lock in current returns for a full year.
- Inflation stability: Moderate price growth gives investors confidence that their real returns will not be eroded quickly.
- Risk aversion: Many investors view Treasury securities as safer than equities, especially when market turnover is low.
- Government borrowing needs: The state’s reliance on domestic borrowing keeps T-bill issuance steady, giving investors ample opportunity to participate.
Equity and Bond Market Performance
On the equities front, the Nairobi Securities Exchange recorded modest gains during the week ending September 11, 2025. The NASI rose by 0.4%, the NSE 25 by 2.0%, and the NSE 20 by 1.9%.
However, the optimism was tempered by a sharp decline in activity. Market capitalisation edged up by 0.4%, but equity turnover slumped by 30.8%, while total shares traded fell by 15.8%.
Bond markets mirrored this slowdown. Domestic secondary bond turnover dropped by 21%, according to CBK’s weekly bulletin. On international markets, Kenya’s Eurobond yields fell by an average of 60.6 basis points, in line with improved sentiment toward African sovereigns such as Côte d’Ivoire and Angola.
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Lending Rates Remain Stubbornly High
Despite the CBK’s accommodative stance, borrowers are not yet feeling relief. Data from the regulator shows that the average lending rate among commercial banks remains elevated at about 15.65%.
According to Samuel Tiriongo, Director of Research and Policy at the Kenya Bankers Association, the disconnect is largely due to credit risk considerations. Banks factor in customer profiles, sector risks, and operational costs when setting lending rates. As a result, even with a lower policy rate, actual borrowing costs for households and businesses remain high.
This disconnect highlights the lag between monetary policy adjustments and commercial lending behaviour. For small and medium-sized enterprises (SMEs), which rely heavily on bank credit, the persistence of high rates constrains investment and expansion.
Implications for Investors and Borrowers
- Fixed income investors benefit from current yields but know rates may decline. Oversubscriptions indicate strong competition, suggesting yields may continue trending downward.
- Borrowers face expensive credit despite policy easing, slowing investment appetite among businesses.
- Government enjoys strong domestic demand for its securities, which helps with financing but also raises rollover risks due to the short-term nature of T-bills.
- The broader economy sits at a crossroads: while inflation is controlled and growth projections remain steady at 5.2% for 2025, credit-driven private sector expansion is still constrained.
Looking Forward
The next CBK Monetary Policy Committee meeting will be closely watched for signals on the future direction of rates. Inflationary shocks from global energy prices or currency pressures could force a pause in easing. On the other hand, further cuts would make T-bills less lucrative and pressure banks to narrow their spreads.
Key issues to monitor include:
- The pace at which commercial banks adjust lending rates downward.
- Trends in inflation, especially food and fuel prices.
- Shifts in government borrowing between T-bills and longer-term bonds.
- The balance between investor demand for safety and the need for private sector capital.
Conclusion
Kenyan investors are making bold moves in Treasury bills, especially the 364-day note, as they seek to secure returns before rates fall further. While CBK policy is easing and inflation remains stable, the stubbornly high lending rates from commercial banks reveal the structural challenges within Kenya’s credit markets.
For now, Treasury securities remain a haven, but the broader question is whether the easing cycle will eventually translate into cheaper credit and stronger growth. The months ahead will determine whether policy and markets converge — or whether the disconnect between monetary easing and bank lending persists.
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By: Montel Kamau
Serrari Financial Analyst
15th September, 2025
