The Central Bank of Kenya (CBK) has offered a return of 16 percent on a new ten-year bond as it seeks to entice investors to take up longer-dated securities.
The paper is the longest-dated issue by the government's fiscal year in more than a year and is indicative of attempts by the apex bank to re-issue medium- to long-term bonds and avoid the risk of too many securities maturing around the same time.
The 16 percent coupon presents a bidding guidance for investors and is a departure from CBK’s routine of letting the markets decide the return of new bonds. It is also a signal that CBK intends to start lowering rates, with the 16 percent rate offered being lower than the 18.46 percent which the recent 8.5 year tax-free infrastructure bond fetched.
Interest on the 10-year bond will be taxed at 10 percent. The 16 percent offer for the paper is however a premium compared to bonds with a similar time to maturity, with two 15-year papers maturing in January and April 2034 for instance having coupons of 12.8570 and 12.7340 respectively.
Last year’s solo 10-year paper which was issued in February currently has a coupon of 14.151 percent.
The CBK has shunned issuing longer term bonds on the backdrop of higher interest rates on government securities which would have meant a higher cost of domestic debt over the longer term.
Instead CBK has preferred auctioning short-dated securities, mostly ranging between three and five years even as this results in a reduction on the average time to maturity for government bonds.
“Long term bonds bear higher coupon rates payable 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, with significant implication on the cost of servicing domestic debt,” the CBK notes in its latest financial sector stability report.
The CBK will be seeking to raise Sh40 billion from the March bond auction which includes two reopened papers --a three year and a five year paper which have 2.9 and 4.4 years left to maturity respectively.
The two papers have coupon (interest) rates of 18.3854 and 16.844 percent with the CBK being widely expected to contain fresh investor bids within the coupon rates by rejecting aggressive bids.
The CBK has already shown its readiness to reject aggressive investor bids having left Sh47.7 billion on the table at the end of February’s infrastructure bond sale.
The auction for the reopened three-year paper is expected to run until March 6 while the re-opened five-year and the new 10-year paper is expected to run until March 20.
The raising of Sh240.9 billion from the infrastructure bond has considerably lowered pressure on CBK to meet the domestic borrowing target giving it the leeway to snub aggressive investor bids.
The recently oversubscribed infrastructure bond has also marked a return of foreign investor interest widening the pool of investors for government securities.
The new 10-year bond is likely to attract pension funds and insurance funds which have a higher tolerance for longer-term securities compared to commercial banks.
