Secondary market trading for Treasury bills overdue
CALL Rediscounting begs for a platform where the state paper will be exchanged
Secondary market fixed income trading volumes at the Nairobi Securities Exchange (NSE) for the first 36 weeks of the year (January 4 to September 8, 2017) came under immense pressure, declining by two per cent on a year-on-year basis.
This is in spite of primary yields declining by nearly 200 basis points year-on-year in a similar period-which is a bit of a puzzle because, generally, a decline is good for secondary market activities.
Nonetheless, this rigidity underscores the urgent need for an additional product in the secondary market: tradability of Treasury bills.
Currently, only Treasury bonds are dealt.
And this is not the first time I’m calling on secondary market players to speed up the establishment of mechanism(s) for the tradability of Treasury bills. I initially thought trading of T-bills would go live in the first half of the year but that didn’t seem to crystallise.
Yet the numbers continually support the need for such a platform. In the first 36 weeks of the year, a total of Sh25 billion worth of T-bills has been rediscounted at the Central Bank of Kenya (CBK). While it is equivalent to just eight per cent of Treasury bonds traded in the secondary market during the period, it’s still staggering by all means.
For the full year 2016, the total value of bills rediscounted at the Central Bank stood at Sh33 billion. And with three months to go before the year ends, this year’s rediscounting could surpass the 2016 figure. What is rediscounting? Suppose you have used up all your entire savings to buy a 182-day Treasury bill, worth, for arguments sake, Sh1 million, issued at an interest rate of 10 per cent per annum.
You probably paid Sh950,000 since Treasury bills are issued at a discount, which is applied upfront.
Suppose two months down the line, you run into an emergency that requires significant monetary intervention.
You probably would want to ask the issuer, in this case CBK (of course acting on behalf of National Treasury), to give you back your investments so that you can be able to handle your emergency.
Because you bought the bill at a discount to par, the issuer of the bill will want to penalise you for occasioning a liquidity
inconvenience. This then attracts a second discounthence the term rediscount. Essentially, to rediscount is to declare a discount for the second time.
It could also be that you are not being penalised, but rather being rewarded with a further discount on price(s) by the issuer.
However, you could avoid the penalty if the instrument can be easily sold to another investor in an open secondary market.
Hence my conclusions that the rediscounting market is very representative of the demand for an active secondary market for bills.
The average days-to-maturity (DTM) of bills discounted, however, declined to 109 days, compared to 126 days in 2016.
While the DTM stretch could mean a number of things, it is quite visible that the sun barely goes down before investors start trooping for red is counting especially for the shorter tenured instruments.
Therefore this further concretises the fact that a secondary market platform for Treasury bills is now long overdue.
You could avoid the penalty if the instrument can be easily sold to another investor in an open secondary market”