Treasury yields show no respite

In August, inflation continued to decelerate, falling to an 18-month low of 6.7%, having already dropped to 7.3% in July from a peak of 8% in May. Given elevated global oil prices, second-round effects of fiscal measures and recent noise around global food prices, we think it is too early to celebrate.

By end of August, three-month T-bill yields jumped nearly touched 14% as yields continue to rise sharply. Such a rise comes amidst elevated interbank rates as well as elevated maturities in the Treasury market.

The upward trend likely to sustain

We maintain our view that yields will continue to trend upward. Investors are likely to remain wary of potential fiscal slippages, which will most likely lead to even further rises in the quantum of domestic borrowing. Higher global food and oil prices are also an upside risk to inflation.

FX pressures persist

The Kenya Shilling continued to slide and recently hit Ksh.146 to the USD. FX reserves fell USD805 million since the end of July to USD7.1bn (3.8 month of import cover); due to external debt amortization and financing of the current account deficit. The IMF expects import cover to fall to 3.3 months by the end of 2023.