Despite being assured of making at least Sh50 billion from the yet-to-be concluded Safaricom IPO, the Government is back on the market seeking to borrow at least Sh7 billion through the monthly Treasury bonds auction.

Treasury will this time round have the opportunity to flex its muscles on buyers of the bonds, after one month of having to contend with lacklustre applications for Government securities during the Safaricom initial public offering application period.

Investors in Treasury securities are mainly commercial banks, insurance companies and investment management firms.

Between March 28 and April 23, when the Safaricom IPO application period remained open, Treasury bills and bonds suffered under-subscription as the institutions opted to invest in the supposedly more lucrative Safaricom offer.

But attention is now likely to shift to Government securities following last week's announcement that the Safaricom issue has been oversubscribed by close to four times. The Government announced that it had received applications valued at Sh191 billion from both local and foreign investors, surpassing Treasury's target from the offer by nearly four times.

CBK invited applications for two year Treasury bonds valued at Sh7 billion on Friday, with an indicative coupon interest rate of 8.75 per cent.

And perhaps taking a cue from last month's overwhelming oversubscription of its two year bonds, central bank has decided to exclusively float only two year bonds.

This is a departure from last month's twin floatation of two-year and five-year bonds.

Investors put in applications of Sh4.1 billion and Sh6.5 billion for the five year and two year bonds respectively, indicating their preference for the shorter term paper.

Head of investment banking and fund management at Suntra Investment Bank Charles Ocholla says that the greater appetite for two-year bonds is attributable to a flattening of the yield curve as interest rates continue to rise on the short end of the market yield curve.

The yield on two-year Treasury notes has risen substantially over the last year with last month's average yield on the two-year Treasury bond edging up by 62.7 basis points from 9.44 per cent for a bond of similar tenor issued last year to 10.06 per cent.

Mr Ocholla says that interest rates are likely to continue rising, at least on the lower end of the yield curve as Safaricom IPO funds are still locked up with the receiving banks which has taken away a good amount of liquidity from the money market.

Interest rates on Treasury bills, which are perceived as the indicators of market interest rate trends, showed mixed trends during last week's weekly auction.

The average 91-day Treasury bills rate declined by 7.3 basis points during the auction from 7.83 per cent in the previous week's auction to 7.76 per cent while the average 182-day Treasury bills rate rose by 4.0 basis points from 8.73 per cent to 8.77 per cent.

Average inter bank rates rose during the week ending last Thursday by 79 basis points from 6.94 per cent in the previous week to 7.73 per cent. CBK also attributed the overall rising trend in interest rates to tight market liquidity.

"The interest rate movements could be attributed to the tight market conditions prevailing during the week," says CBK in its latest weekly report.

Mr Ocholla, however, adds that the Government is likely to put a ceiling on the interest rates given the relatively comfortable cash outlook following the successful Safaricom IPO.

"There is the possibility that with the Government assured of receiving Sh50 billion from the Safaricom IPO, it may decline to take all the funds if the rates are too high.

Head of research at Old Mutual Asset Management Joshua Njiru says that the current offer is likely to receive full subscription given the attractive interest rates.

Mr Njiru, however, says that inflation is still a major concern for most investors.

"The offer is likely to receive a lot of subscription from investors keen on locking in the high interest rates," says Mr Njiru.

Overall, 12-month inflation increased from 21.8 per cent in March to 26.6 per cent in April. Similarly, average annual inflation increased from 13.0 per cent in March to 14.8 per cent in April.

CBK has attributed the general rise in interest rates to higher prices of food items, fuel and power, and transport and communication services.