Treasury bill rates dip as CBK seeks growth

The Central Bank of Kenya (CBK) has reported a decline in Treasury bill rates across all tenors, marking a calculated policy maneuver aimed at stimulating borrowing and investment while cushioning the economy from global financial turbulence. According to the Weekly Bulletin released on September 26, 2025, the 91-day, 182-day, and 364-day bills settled at 7.914%, 7.985%, and 9.533% respectively, levels that point to an easing trend as the regulator tries to create momentum for growth.

The move followed the September 25 Treasury bill auction, which attracted KSh 15.1 billion against an advertised KSh 24 billion, translating to a modest 62.9% subscription rate. While the underperformance raised eyebrows, the CBK’s decision to accommodate lower yields suggests a balancing act between investor appetite and the government’s borrowing strategy.

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The Auction and Shifting Market Signals

Treasury bills, Kenya’s short-term government securities, remain a critical tool for raising domestic financing while providing investors with safe, liquid instruments. However, the latest auction revealed tepid demand, with investors cautious at prevailing rates.

The central bank reported that despite fewer bids, the money market itself remained flush with liquidity. Interbank transactions surged to an average of 31 deals valued at KSh 17.2 billion, more than double the KSh 7.9 billion recorded the previous week. This liquidity suggests that while cash was available, investors were selective, waiting for yields to align better with perceived risk.

Analysts note that such cautious behavior often arises when investors anticipate further rate cuts or when alternative assets such as infrastructure bonds appear more attractive. Indeed, CBK has increasingly leaned on longer-dated infrastructure bonds, which are tax-exempt and carry higher coupons, making them popular among institutional investors.

Domestic Bond Market vs Equity Market

The bulletin also highlighted contrasting trends across markets. Domestic bond turnover fell by 6% in the week ending September 25, a sign of hesitancy among fixed-income investors. Rising global yields, particularly on emerging market debt, may have fueled caution locally, with investors reassessing risk-return trade-offs.

In contrast, the Nairobi Securities Exchange (NSE) showed signs of resilience. The NASI index rose by 1.6%, while the NSE 25 and NSE 20 indices gained 1.7% and 1.0% respectively. Market capitalization grew in tandem, with equity turnover climbing 12.1%. This divergence indicates a rotation of capital, with some investors favoring equities as global rate pressures dampened appetite for bonds.

Global Pressures and External Shocks

CBK’s easing stance must also be read in light of international developments. The U.S. Dollar Index strengthened by 1.2% in the review period, putting pressure on frontier market currencies like the shilling. Meanwhile, Kenya’s Eurobond yields rose by 18.5 basis points, reflecting investors’ heightened caution toward emerging markets amid global monetary tightening.

Despite these pressures, Kenya’s external buffers remain stable. The country’s foreign exchange reserves stood at KSh 1.402 trillion, equivalent to 4.7 months of import cover, comfortably above statutory thresholds. The CBK emphasized that reserves are “adequate” to protect the economy from external shocks, though further global volatility could still test resilience.

One positive factor has been the stability in oil prices. Murban crude averaged $69.85 per barrel on September 25, only marginally lower than the previous week’s $69.95. Stable energy costs have helped temper inflation, giving policymakers more room to focus on stimulating domestic activity.

Monetary Policy Context

The decline in T-bill rates complements CBK’s broader monetary easing. In August 2025, the Monetary Policy Committee executed its seventh consecutive rate cut, lowering the policy rate by 25 basis points to 9.50%. According to a Reuters report, inflation was trending within target, enabling CBK to maintain its growth-friendly stance.

At the short end, yields have shifted down markedly. The 91-day T-bill fell below 8% for the first time since 2022 earlier this month, as highlighted by Soko Directory. Back in June, yields were still above 9% and in some cases approaching double digits. The shift signals not only monetary easing but also strong investor demand for safe short-term assets at lower yields.

At the longer end, CBK has relied heavily on reopened infrastructure bonds. In June, for example, the Treasury successfully raised KSh 71.6 billion through a dual-tranche bond reopening against a target of KSh 50 billion, as reported by Kenyan Wall Street. These instruments, exempt from taxes and designed for infrastructure funding, have consistently outperformed short-term bills in attracting investor interest.

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Implications for the Economy

Borrowers and Credit Growth

Lower Treasury bill yields should gradually translate into reduced borrowing costs for corporates and households. Commercial banks use government paper as a benchmark for pricing loans, meaning lower T-bill rates may soften lending rates over time. This could encourage businesses to expand credit uptake, spur investment, and stimulate economic activity.

Investors and Fund Managers

For investors, the immediate effect is compressed yields. Money Market Funds (MMFs), which rely heavily on T-bills for returns, face shrinking margins. Some have already flagged weaker returns, as reported by Nyakundi Report. With rates slipping below 10%, MMFs may struggle to deliver the double-digit yields that have traditionally made them popular.

Fund managers may thus pivot toward longer-term securities, including infrastructure bonds and corporate debt, to maintain returns. This shift could rebalance the fixed-income landscape, with implications for liquidity and secondary market turnover.

Government Borrowing Costs

For the Treasury, declining yields are a welcome relief. Kenya’s debt servicing burden has been mounting, and lowering domestic borrowing costs frees up fiscal space. However, the under-subscription in recent auctions raises concerns: if investors hold back despite lower rates, the government may need to rethink issuance strategies to ensure financing needs are met.

Risks and Challenges

While the easing stance has merits, it is not without risks:

1. Capital Outflows: Rising U.S. and European yields could prompt investors to exit frontier markets, weakening the shilling and pressuring reserves.
   
2. Inflationary Pressures: Should oil prices spike again or food inflation rise, the CBK may have limited space to continue easing.
   
3. Debt Sustainability: While lower yields reduce borrowing costs, Kenya’s overall debt burden remains high. Sustained reliance on domestic markets could still strain fiscal sustainability.
   
4. Investor Confidence: If auctions continue underperforming, confidence in government securities could erode, forcing CBK and Treasury to recalibrate.
   

Looking Ahead

Key Metrics to Watch

• Upcoming Treasury auctions: Will lower rates attract stronger subscription in October and beyond?
  
• CBK MPC meetings: The next policy stance will reveal whether easing continues or pauses.
  
• Inflation data: Especially food and energy, which could reverse the easing narrative.
  
• Global market sentiment: Rising Eurobond yields and a strong U.S. dollar remain critical risks.
  

Strategic Policy Balance

Kenya’s strategy rests on a dual approach: easing domestic conditions while safeguarding external stability. By lowering T-bill rates but keeping reserves strong, CBK hopes to stimulate growth without undermining market confidence.

As noted by Kenyan Wall Street, investor appetite has already been shifting toward longer-dated, higher-yield securities. Policymakers may therefore need to rely more heavily on infrastructure bonds and medium-term instruments to strike the balance between affordability and attractiveness.

Conclusion

The CBK’s decision to let Treasury bill rates fall across all tenors underscores its commitment to stimulating growth amid a volatile global backdrop. With short-term yields now under 8% for the first time in years and borrowing costs easing, the central bank is clearly signaling confidence in Kenya’s ability to sustain low inflation while promoting investment.

Yet challenges remain. Global headwinds—from strengthening dollar dynamics to rising Eurobond yields—could quickly test Kenya’s resilience. For investors, the new era of lower T-bill returns may necessitate recalibration toward longer-term or riskier assets. For the government, ensuring strong auction performance while containing debt risks will be key.

Ultimately, the September 2025 bulletin reflects a financial system at a crossroads: leaning into growth-supportive policy, but mindful of the thin line between opportunity and vulnerability.

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By: Montel Kamau

Serrari Financial Analyst

2nd October, 2025