The government has set the target for its first bond issue of 2017 at Sh30 billion as it moves to plug a gaping budget deficit amid huge debt maturities in quarter one of this year.
The Treasury has opted to reopen a 15-year bond initially issued in 2007, meaning it effectively has a five-year tenor (its maturity is in 2022).
It is earmarked for budgetary support, with the government still needing to plug a deficit of Sh516 billion for the 2016/17 fiscal year.
The paper is offering a fixed coupon rate of 13.5 per cent, similar to the average rate on offer for five-year bonds in the past two years.
An investor will therefore earn 6.75 per cent every six months when the interest income is normally calculated and paid.
“We opine that the CBK settled on the bond, which has a five-year tenor, on account of the shilling’s weak outlook in the near term causing most investors to employ a short term duration strategy. The five-year yield on the curve has averaged 13.49 per cent within the last two years,” Genghis analyst Churchill Ogutu said in a fixed income note.
It is on sale at a time when liquidity in the market has tightened due to a CBK mop-up in partial support of the volatile shilling.
Indicative of the tight market, the interbank rate has climbed to nine per cent, its highest level in six months with banks transacting Sh217 billion on the platform since the beginning of the year.
The Treasury has so far kept off borrowing from the international market despite a Sh287 billion target for external debt.
It is, however, facing heavy maturities in February (Sh106 billion) and March (Sh91.5 billion) that will need to be rolled over through new borrowing, possibly straining the domestic market and putting pressure on yields.
At the same time, the government has been rejecting expensive bids in recent issues, given that it is ahead of the pro-rated target for domestic borrowing for the fiscal year.