Yields Stay Subdued: Kenya Treasury Bill Rates Hold Below 10 Percent

Kenyan Treasury bill yields remained below the 10 percent mark across all maturities at the latest government securities auction, reflecting a sustained period of lower short-term borrowing costs for the government and shifting returns for local investors.

Data published on the Central Bank of Kenya portal shows that interest rates on the 91-day, 182-day and 364-day Treasury bills have maintained their downward trajectory. The subdued yields follow a series of policy adjustments by the Central Bank of Kenya (CBK) aimed at easing domestic liquidity conditions and lowering borrowing costs across the economy.

For ordinary Kenyans, lower Treasury bill rates mean that commercial banks face reduced pressure to offer high interest rates on fixed deposit accounts, while simultaneously reducing the benchmark used to price commercial loans.

What happened at the auction?

Yields across short-term government debt instruments have dropped significantly from the peak levels seen in early 2024, when yields on all maturities hovered well above 15 percent.

The decline in yields across the three tenors, the 91-day, 182-day and 364-day instruments, indicates strong investor demand for short-term risk-free paper despite the lower offered returns.

Commercial banks, institutional investors, and retail buyers participating through the Central Bank of Kenya's DhowCSD portal have continued to direct capital toward government debt, preferring safety amidst broader market shifts.

The Central Bank of Kenya, which acts as the fiscal agent for the National Treasury, uses these weekly auctions to raise short-term funds for government expenditure and debt refinancing.

Why are interest rates falling?

The continued suppression of Treasury bill yields aligns with the Central Bank of Kenya's broader monetary policy direction. The Monetary Policy Committee (MPC) has been easing the Central Bank Rate, the benchmark rate used to signal policy direction, to stimulate economic activity as inflation cools.

Headline inflation in Kenya has slowed significantly toward the target mid-point of 5 percent, allowing policymakers to shift their focus from aggressive inflation-fighting to supporting credit growth in the private sector. Additionally, the stabilisation of the Kenya Shilling against major foreign currencies, including the US Dollar, has reduced foreign exchange pressures and boosted confidence in domestic currency assets.

By keeping Treasury bill yields under 10 percent, the government is also managing its domestic debt service burden. High interest rates on short-term debt dramatically increase the amount of taxpayers' money required to pay back lenders, squeezing allocation for development projects.

What it means for investors and borrowers

The drop in government paper returns fundamentally changes the calculus for domestic savers and institutional fund managers. High Treasury bill yields throughout 2023 and early 2024 drove money out of equities and bank deposits directly into government debt. With returns now below 10 percent, individual investors using the DhowCSD platform will see lower net returns on their short-term savings.

Conversely, lower yields on government debt typically push commercial banks to seek higher returns by lending to businesses and individuals, rather than simply parking capital in risk-free government paper.

As risk-free yields fall, commercial lending rates are expected to gradually adjust downward. This shift is intended to lower the cost of capital for Kenyan enterprises, reduce monthly repayments on variable-rate loans, and boost private sector credit uptake.

Central Bank of Kenya auction watch

Market participants will closely monitor upcoming Central Bank of Kenya auctions to see if Treasury bill yields stabilise at current levels or slide further.

The National Treasury's domestic borrowing target for the current financial year will play a critical role in shaping market dynamics. If the government requires heavy domestic borrowing to fill fiscal gaps, it may face pressure to offer higher yields to attract sufficient capital. However, if external financing flows remain steady and revenue collection improves, yields are likely to stay compressed, anchoring lower interest rates across the financial sector.