Pension funds raised holdings of government debt by Sh45 billion to Sh538 billion in the fourth quarter of the year as banks reduced theirs, latest data from the Central Bank of Kenya (CBK) shows.
Banks recorded a Sh25 billion decline in their stock to Sh995 billion, although the lenders are expected to raise their lending to the State in the medium-term in reaction to the capping of customer loan rates.
The total stock of the government domestic debt stands at Sh1.907 trillion, having gone up by Sh53 billion since the end of the third quarter of the year and by Sh100 billion since the start of the current fiscal year in July.
Pension funds now hold an equivalent of 28.2 per cent of the total debt, up from 26.6 per cent at the end of September, while banks’ holding is equivalent to 52.2 per cent, down from 55 per cent in September.
Market players say that the pension funds were looking for the superior returns available from fixed income compared to other investments, while banks slowed down their take-up of new government securities in quarter four after largely hitting revenue targets from fixed income for the year during the first nine months of trading.
“After interest rates capping, pension funds were left with very few options in terms of investments— a favourite pre-capping were bank stocks that came plummeting post capping. Placing deposits also became less favourable making them focus on fixed income which offered a better investment case and return informing the increase in their uptake,” said NIC Securities fixed income dealer Stanslaus Kimani.
“Most tier one and two banks had met their revenue target from fixed income trading by end of third quarter, seeing them either completely out of the primary auctions or only participating in a small way in the bills segment. Going into the New Year banks uptake should resume to levels higher than what is in the statistical reports.”
The CBK data shows that only banks cut their holdings in nominal terms during the quarter, with insurance firms, parastatals and other investors joining pension funds in raising their holdings.
Other investors including individuals, saccos and investment clubs have raised their holdings of government debt by one percentage point to 6.6 per cent, the equivalent of Sh12 billion, to Sh126 billion during the quarter.
Parastatals’ holdings are up by Sh9 billion to Sh111 billion, representing 5.8 per cent of the total debt stock.
Insurance firms have increased their holdings over the period by only a modest Sh2 billion to Sh139 billion, meaning that their share of the total debt has fallen from 7.4 per cent to 7.3 per cent.
The preference by pension funds to invest in fixed income this year is driven by the poor performance of the equities market, which has shed 23 per cent in the year to date.