The Treasury faces medium to long-term refinancing pressures from shortened maturity times for bonds, as it seeks to avoid the issuance of long-dated securities.
The shortened Treasury bonds duration means the exchequer could be forced to make higher principal repayments to investors in a shorter time duration.
According to new data from the Central Bank of Kenya (CBK), the average time to maturity for bonds has shortened to 8.5 years as of June from a higher mean duration of 9.1 years in November 2022.
This comes in the backdrop of the issuance of short-dated bonds as the government avoids paying out high interest rates to bond investors for longer. As a result, the CBK has not issued any new mid to long-tenured bonds all year, save for a 17-year infrastructure bond tap sale in March.
Instead, the apex bank has leaned on the issuance of new and re-opened bond issuances whose terms have ranged between two and five years.
Nevertheless, analysts reckon the risks presented in the mid to long-term may not necessarily materialise with CBK and the National Treasury having previously taken advantage of ample liquidity in the money markets, to issue longer dated securities as a buffer.
The longer dated securities for instance helped to lift the average time to maturity for bonds from 6.2 years in the fiscal year to June 2018 to 9.1 years for years in the year to June 2022.
“It’s not the worst thing in the world-for the average time to maturity for bonds to drop- as the maturities will still not happen as first,” noted an analyst from Sterling Capital.
The issuance of long-dated bonds works largely to reduce refinancing risks allowing the government to spread out principal repayments to investors. The government has nevertheless accepted a lower average time to maturity on bonds as a tradeoff in the face of high interest rates resulting from rising inflation, sustained deficit financing from the domestic market and the expectation from investors for higher yields.
“I don’t see any risk as what the government is doing now is absorbing high interest rates by issuing short-dated securities. The government will be in a position to refinance the short-term papers using long-term bonds when the market recovers and interest rates begin to fall,” Wesley Manambo, an analyst at Standard Investment Bank noted.
The Treasury has avoided issuing long-term bonds with the view to manage interest costs over the long-term.
“ Long-term bonds bear higher coupon rates for a long time. Therefore, issuing a substantial amount of long dated bonds in periods of high interest rates shifts the entire yield curve outward,” the CBK noted in its latest financial sector stability report published last week.
As of October 6, Treasury bonds represented 86.17 percent of government domestic debt, trouncing the shorter dated Treasury bills which represent 11.52 percent of domestic debt.
The Treasury is expected to pay down Sh374.5 billion in internal domestic debt redemptions- summation of Treasury bonds and bills maturities, in the fiscal year to June. The redemptions are expected to trend upwards, reaching Sh564.4 billion in the 2026/27 Financial Year.
