Foreign investors cut bond holdings by 85 per cent for lucrative short-term papers

Foreign investors have significantly reduced their holdings of Treasury bonds, dropping to Sh4.9 billion in the quarter ending June 2024 from Sh32 billion in the same period last year.

The reduction represents an 84.6 cut down with the shift largely driven by a search for higher yields offered by shorter-term securities.

Conversely in the period under review, foreign investments in Treasury bills have increased, as highlighted in the Kenya Bureau of Statistics (KNBS's) second-quarter balance of payments report.

The report highlights that non-resident holdings of Treasury bonds have declined sharply, while the demand for short-term government papers has grown, with their stock rising to Sh329 million by the end of June 2024.

This trend among foreign investors aligns with that of local institutional and individual investors, who have favoured shorter-term securities over the past year due to the rising interest rate environment.

Reportedly, many are looking to avoid the reduced returns associated with longer-dated bonds.

However, the anticipation of lower interest rates on government securities in the future may entice investors back into the bond market, as they seek to lock in attractive returns before yields decline.

Treasury bills are short-term investments that mature in one year or less whereas treasury bonds offer the longest commitment, taking 20 or 30 years to mature.

In August, the Central Bank of Kenya (CBK) lowered its benchmark lending rate by 0.25 per cent, bringing it down to 12.75 per cent from 13 per cent.

This move has been followed by consecutive weeks of decreasing rates on shorter-dated securities.

As of the end of September, rates on the 91-, 182-, and 364-day Treasury bills have fallen for nine consecutive weeks, closing at 15.7183 per cent, 16.5888 per cent, and 16.7999 per cent, down from 16 per cent, 16.8506 per cent, and 16.9212 per cent in late July.

With growing market expectations of further cuts to the CBK's policy rate next week, there is potential for a more significant decline in domestic interest rates.

This could lead investors to shift away from shorter-term papers, opting instead to secure higher returns for extended periods.