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Kenyan Bond Yields Seen Rising as Shilling Drop Fans Inflation

A drop in Kenya’s shilling to near the lowest level in almost three years and an acceleration in inflation threatens to push up borrowing costs, according to Standard Chartered Plc.

“Inflation is likely to pick up modestly in coming months,” Samir Gadio, head of Africa strategy at Standard Chartered in London, said in e-mailed comments today. “Bond yields should still remain in positive CPI-adjusted territory.”

The shilling was little changed 88.31 per dollar as of 3:15 p.m. in Nairobi, the capital. A close at that level will be the lowest since December 2011 and extends losses this year to 2.3 percent. Inflation in East Africa’s biggest economy accelerated to 7.7 percent in July from 7.4 percent the previous month, above the government’s 7.5 percent target ceiling.

The central bank auctioned 1.53 billion shillings ($17 million) of bonds due January 2041 yesterday at an average yield of 13.78 percent, compared with 16.4 percent at a sale in August 2011. Yields on the notes dropped 90 basis points, or 0.9 percentage point, to 13 percent today. It also auctioned 13.5 billion shillings of securities due June 2018 at an average rate of 11.13 percent, compared with 11.93 percent at a June 29 auction. Yields on the four-year debt were unchanged at 11.05 percent.

“With the shilling breaking the 88 level, the Central Bank of Kenya will most likely be more reluctant to allow lower market yields, especially at the short end,” Gadio said. “At the same time, they will probably continue to reject more aggressive bids as well.”

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