364-Day T-Bill Heavily Oversubscribed for Second Week

Demand Surges in September

Investor appetite for the 364-day Treasury bill has been unusually strong in September. According to the Central Bank of Kenya, bids for the paper have exceeded supply for two consecutive weeks, highlighting how investors are positioning themselves in a declining rate environment.

On 8 September 2025, the CBK received bids worth KSh 23.10 billion against an offer of KSh 10 billion, representing a 231% performance rate. Out of this, the regulator accepted KSh 19.08 billion at an average yield of 9.5790%, slightly higher than the previous week.

A week later, bids remained strong at KSh 20.23 billion, though CBK accepted only KSh 11.06 billion. The yield eased to 9.5483%, showing a small drop but still keeping the tenor as the most attractive among short-term securities.

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Why the 364-Day Bill Stands Out

Declining Rate Environment

The CBK Monetary Policy Committee recently cut the Central Bank Rate (CBR) to 9.50%, marking the seventh reduction in the current easing cycle. As reported by Reuters, inflation has remained within target, giving policymakers room to loosen further. Investors now expect more cuts, which would reduce future returns on short-term debt.

By locking into the 364-day paper, they secure yields that are already close to the policy rate, avoiding erosion of returns should the CBR fall again.

Risk Aversion and Liquidity Preference

The contrast between short- and long-term securities is stark. The re-opened 30-year Savings and Development Bond (SDB1/2011/030) attracted bids of just KSh 8.07 billion against a target far higher. Only KSh 2.40 billion was accepted, translating to a weak 40.35% subscription rate, even with an average yield of 13.96%.

This shows that investors are wary of long-duration risk, preferring instruments that combine safety, liquidity, and proximity to the policy rate.

Broader Context in Fixed Income

Performance Across Tenors

Other short-dated bills — 91-day and 182-day — continue to perform well but at lower yields, around 7.97% and 8.02% respectively, according to CBK data. The steeper yield of the 364-day, relative to its risk, makes it the most appealing option.

Front-Loading Borrowing

The Treasury has been front-loading domestic borrowing. In August, it raised KSh 179.8 billion through a tap sale of infrastructure bonds after collecting KSh 95 billion in the initial reopening. Coverage from the Kenyan Wall Street shows this has already pushed net domestic borrowing close to KSh 260 billion, or 41% of the annual target, within just three months of the fiscal year.

High subscription of the 364-day paper provides the government with flexibility, helping it to fund obligations early at relatively lower cost.

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Fiscal Pressures in the Background

Kenya’s fiscal deficit widened to 5.8% of GDP in the year to June, up from 5.6% the year before. Reporting by Business Daily attributes this to carryover expenditures of KSh 218 billion and missed revenue after the withdrawal of the Finance Bill 2024, which cost an estimated KSh 344.3 billion.

Total revenues for FY 2024/25 reached KSh 2.918 trillion, falling short by KSh 67 billion, while expenditures were about KSh 3.96 trillion. Treasury has projected a smaller deficit of 4.7% of GDP in FY 2025/26, assuming revenues rise to KSh 3.32 trillion.

Implications of Oversubscription

For the Treasury

• Strong demand allows the government to accept lower amounts at favourable yields, keeping borrowing costs contained.
  
• It signals continued confidence in government securities, critical for meeting upcoming obligations.
  
• Oversubscription provides room to manage maturities without excessive reliance on high-coupon long-term bonds.
  

For Investors

• Locking in near-double-digit returns for a year is attractive given expectations of falling rates.
  
• Liquidity in the secondary market remains decent, enabling exit if cash is needed.
  
• T-Bills carry minimal credit risk, making them a safer bet compared to equities, which have seen turnover decline.
  

For the Economy

• Heavy investor preference for government paper can crowd out private sector credit, raising borrowing costs for businesses.
  
• However, it provides Treasury with predictable funding, supporting fiscal stability.
  
• If borrowing is used for productive infrastructure, long-term benefits could outweigh near-term crowding-out risks.
  

Risks to Watch

1. Inflation shocks — Food and fuel price spikes could force higher rates, hurting investors who lock in now.
   
2. Revenue shortfalls — Persistent under-collection could lead Treasury to issue more paper, pushing yields higher.
   
3. External conditions — Rising global interest rates could pressure Kenya’s cost of borrowing upward.
   
4. Crowding out effect — If banks keep lending more to government than to businesses, economic growth could be constrained.
   

Market Reactions

Bond traders at the Nairobi Securities Exchange report that short-term government securities have seen increased turnover, while long-dated infrastructure bonds remain sluggish. Analysts at NCBA have cautioned that although short-term liquidity is abundant, fiscal consolidation will be needed to sustain investor confidence over the medium term.

Regional Comparison

Kenya’s preference for shorter-dated paper mirrors regional patterns:

• In Uganda, investors have also flocked to 364-day T-bills in recent months, with yields slightly above 10%.
  
• Tanzania has leaned more on 2- to 5-year bonds, though subscription rates have fluctuated depending on liquidity.
  
• Nigeria, with high inflation, has seen investors demand double-digit yields across all maturities.
  

Kenya’s situation is different because inflation remains under control, allowing rates to be compressed while still attracting healthy demand.

Outlook

The CBK is likely to continue balancing between cutting policy rates and maintaining investor confidence. If inflation remains stable, yields on the 364-day bill could decline further, but demand may remain high as long as returns stay near parity with the CBR.

The muted interest in the 30-year infrastructure bond suggests investors are not ready to take long-term bets amid fiscal uncertainty. Treasury may therefore lean more heavily on T-bills and medium-term bonds to meet its financing needs in the near future.

Conclusion

The 364-day Treasury bill has become the star of Kenya’s fixed-income market in September 2025, with oversubscription levels above 200% for two weeks in a row. Investors are clearly voting for safety, liquidity, and short-term yield, while shunning long-term instruments despite their higher coupons.

For the Treasury, this signals strong confidence in government securities and provides breathing room to finance its operations. Yet, the bigger challenge remains fiscal consolidation and sustainable debt management. Without improved revenue collection and discipline in spending, heavy reliance on short-term borrowing could create rollover risks down the line.

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Photo source: Google

By: Montel Kamau

Serrari Financial Analyst

12th September, 2025