Pensioners in Kenya are facing a precarious financial situation as Treasury Bill (T-Bill) yields continue to decline, a trend that has been attributed to excess liquidity in the banking sector.

This decline in yields poses significant risks to the financial stability of retirees who rely heavily on these government securities for their income.

As the Central Bank of Kenya (CBK) implements monetary policy aimed at stimulating economic activity, the implications for pensioners and the government present a complex financial landscape.

Over the past few months, T-Bill yields have experienced a remarkable decline. Data from the CBK’s weekly bulletin for the week ending November 29, 2024, indicates that the yield on the 91-day T-Bill fell from 15.9 per cent to 11.3 per cent, while the 182-day T-Bill decreased from 16.7 per cent to 11.3 per cent, and the 364-day T-Bill dropped from 16.8 per cent to 12.3 per cent.

This sharp decrease in yields is alarming for pensioners, as their interest earnings are directly affected by these rates. With approximately 3.5 million Kenyans actively contributing to retirement benefits programs, many pension schemes have invested heavily in T-Bills, reflecting a strategy focused on stable and low-risk returns.

Financial analysts, including Mohamed Wehliye, a Senior Advisor at the Saudi Arabian Monetary Authority, have expressed concern over this trend. He noted that while falling T-Bill rates may benefit the government by reducing borrowing costs, they are not sustainable and pose significant challenges for banks. “T-bill rates are falling drastically… This strange scenario isn’t sustainable and banks will be the ones to suffer in the long run,” Wehliye said.

The current environment of excess liquidity means that banks are unable to lend effectively, leading to stagnant credit growth. The oversubscription of T-Bills further illustrates this paradox.

The Cytonn Investment analysts, in their latest report indicates that in November 2024, T-bills were oversubscribed with an overall average rate of 347.2 per cent, up from 305.9 per cent in October, due to increased investor demand for short-term government securities.

This high demand reflects investors’ preference for liquidity and lower risk, but it also signals a shift in market dynamics where pensioners may need to seek alternative income sources as their traditional investments yield less.

As yields decline, pension fund managers might be compelled to explore riskier investments such as equities or real estate to maintain their financial security amidst stagnant lending growth that does not align with their risk tolerance. The erosion of purchasing power due to inflation could further diminish pensioners’ standard of living as fixed incomes fail to keep pace with rising costs.

The government’s perspective is markedly different; lower T-Bill rates reduce borrowing costs significantly, allowing it to manage its national budget more effectively. The CBK’s recent decision to lower the base rate to 12 per cent aims to stimulate economic activity by making credit more accessible to businesses and households. However, this move also threatens bank profitability and their ability to attract deposits as falling T-Bill yields diminish returns on savings.