Sec­ondary mar­ket trad­ing for Trea­sury bills over­due

CALL Redis­count­ing begs for a plat­form where the state pa­per will be ex­changed

Business Daily (Kenya) - - MARKET CURVE -

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”

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