The average time to maturity for issued Treasury bonds fell to seven years and nine months or 7.8 years in January, pointing to elevated refinancing pressures on the government as it is forced to meet higher redemptions in a shortened duration.
The Treasury data shows that the average time to maturity for bonds declined from 8.9 years in the same month last year.
The ramp-up in maturities for the long-dated government debt instruments is largely due to the exchequer favouring issuances with shorter tenors in a high-interest rate environment.
The Treasury has often refrained from selling long-term bonds when rates rise significantly, a strategy that is designed to avoid committing to high debt service costs for years.
This, however, ends up in a jump in refinancing risk as many of the short-term securities mature in quick succession. The Treasury recently sold a 10-year bond in an attempt to start lowering interest rates on the fixed securities while also extending their maturity profile.
The paper, which came with a rare interest rate guidance of 16 percent, ended up being auctioned at a market-weighted average rate of 16.5 percent factoring in a discount.
Interest rates in the domestic market have remained elevated over the last two years with investors demanding a premium on bonds in the face of higher inflation and sovereign risks which had been attached to the June Eurobond maturity.
According to the 2024 medium-term debt management strategy, interest rate costs as a percentage of the gross domestic product rose by 1.2 percentage points to 5.5 percent at the end of June 2023, in contrast to the June 2022 target of 4.4 percent of output.
“The interest payment as a share of GDP increased by 1.2 percentage points due to accumulation of debt and increase in interest rates by central banks both in the domestic and international capital markets, to contain inflationary pressures,” the exchequer indicated.
The National Treasury noted that the continued rise in interest rates may result in challenges in financing the 2024/25 budget and performing liability management operations.
Interest rates could however be set to cool down in the near term, following the elimination of the sovereign risk attached to the June Eurobond maturity, through a partial settlement and expected interest rate cuts by global central banks.
Presently, yields on the shorter-dated Treasury bills have begun receding on the prospect of increased external financing from multilateral lenders such as the World Bank and the International Monetary Fund (IMF).
The tapering of domestic interest rates could see the Central Bank of Kenya (CBK) –the government’s fiscal agent— expand issuances of long-dated bonds.
CBK can issue bonds with tenors of up to 25 years as part of its benchmark bonds program with its other favoured tenors being two, five, 10, 15 and 20 years.
At the same time, the apex bank can carry out liability management operations which refer to debt management initiatives aimed at establishing a targeted bond consolidation and refinance program including bond switches and buybacks.
Through the seven months to the end of January 2024, interest costs on debt grew by 25.9 percent with payments on domestic debt tallying to Sh339.1 billion and Sh338.2 billion for external debt.
