Capital Markets

Bond auctions underperform amid investor-CBK interest rate standoff


The National Treasury building in Nairobi. FILE PHOTO | NMG

The Treasury raised just Sh7.9 billion from sales of government securities this week out of a target of Sh43 billion, weighed down by investor apathy and rejection of expensive bids by the Central Bank of Kenya (CBK).

The sales of Treasury bills and a tap sale of September’s bond issue were expected to raise healthy demand due to the high-interest rates on offer, but investor bids fell well below target.

Read: Treasury nets Sh38 billion from July bond auction

On the T-bills sale, which targeted Sh24 billion across the three tenors of three, six and 12 months, the State managed to raise Sh4.52 billion.

Investors put forward bids worth Sh13.66 billion, but in rejecting Sh9.1 billion, the CBK sought to keep a lid on the recent sharp rise in interest rates on the short-term securities that saw the one-year paper hit an eight-year high of 15.22 percent in the previous week’s auction.

In the sale last week, bidders demanded an average of 15.09 percent, 15.31 percent and 16.5 percent on the 91-day, 182-day and 364-day T-bills respectively, which was between 30 and 120 basis points higher than the yields seen in the previous week.

The CBK, however, rejected expensive bids, with the rates on accepted bids for the three tenors settling an average of 14.82 percent, 14.95 percent and 15.05 percent in that order for the three, six and 12-month papers.

In the tap sale of the reopened 10-year and two-year bonds, investors offered the government Sh3.45 billion against a target of Sh15 billion, with the CBK taking up Sh3.39 billion.

The bond yield was set at the rate of accepted bids in the first sale earlier in the month —17.92 percent for the 10-year and 17.45 percent for the two-year option.

In the earlier primary sale of the reopened papers that targeted Sh35 billion, investors had put up bids worth Sh34 billion, but the CBK took up Sh21.6 billion, rejecting the balance on account of expensive rate demands.

Those whose bids were rejected earlier opted to keep out of the tap sale, signalling a rate standoff with the CBK.

Read: Central bank takes Sh43bn from July's bond tap sale

Concerns over the rising cost of domestic debt have seen the Treasury revise the net borrowing target for the current fiscal year to Sh415.3 billion from the initial budgeted amount of Sh586.5 billion.

There is also concern about the transmission of the high-interest rates to private sector borrowing costs, which threatens the growth of the economy by making it hard for businesses to borrow for investment.

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