Eurobond to cut T-bill cash for banks, pensions

The successful sale of a Sh210 billion Eurobond should ease the Government’s domestic borrowing pressure and thus keep interest rates at their current multi-year lows in the short term, analysts say.

This will, however, be bad news for investors especially banks, pension funds, insurers and unit trust who have made a killing from treasuries.

Rates for short-term government debt have hovered about seven to 9.5 percent level in recent months, and with the cash injection from the external bond, the Government is unlikely to face a race for money to finance projects and pay contractors as the fiscal year closes next month.

The Eurobond injection, even though some will be used to roll over the maturing Sh75 billion tranche from the 2014 debut bond, has helped bridge the gap in budget deficit financing that had caused the Government to accelerate domestic borrowing earlier this year.

“In the near term, the proceeds should curtail appetite for domestic debt, taming interest rate expectations. This comes at a time when the Treasury has thus far absorbed Sh284.33 billion from the local market, 91 percent of the fiscal year target,” said Commercial Bank of Africa in a fixed income note.

The budget deficit for the current fiscal year stands at Sh635.5 billion, financed by domestic borrowing of Sh310 billion and external financing at Sh321 billion.

The injection of funds will also ease the Treasury’s headache of managing heavy maturities in domestic borrowing, allowing central banks to continue its stance of rejecting expensive bids in the market.