Bond interest rates breach 14 percent in new sale

 Central Bank of Kenya

The Central Bank of Kenya in Nairobi. FILE PHOTO | NMG

The Central Bank of Kenya (CBK) relented to investor rate demands in the second auction of the October Treasury bond sale, accepting bids at an average above 14 percent as the government continues to face borrowing difficulties in the local market.

The CBK, which is the government’s fiscal agent, said sale of the 25-year bond that targeted Sh20 billion raised bids worth Sh14.9 billion, out of which it took up Sh13.7 billion at an average rate of 14.19 percent.

The monetary regulator has been holding out against breaching the 14 percent level in average coupon or interest rate in recent bond sales, leading to a significant volume of rejected bids at auctions.

The October bond was issued in three tranches, comprising reopened 10-year and 15-year papers, which were auctioned two weeks ago, and the 25-year paper sold this week.

The first two tranches, which targeted Sh40 billion, raised a total of Sh15.1 billion as investors kept away due to concerns over low rates on offer.

The 15-year security performed particularly poorly, raising just Sh1 billion as investor demands for a rate of 14.1 percent were rejected by CBK, with the average rate on accepted bids coming in at 13.9 percent.

Analysts at AIB AXYS Africa said in a note on Wednesday that investors have been alive to the prevailing high global and local inflation, hence their demands for better real returns by placing aggressive bids as compensation for the risks.

The CBK has, however, faced a tough balancing act between accepting expensive bids in order to meet the government’s domestic borrowing target and keeping a lid on rates to prevent an escalation of the State’s borrowing costs.

The underperformance, therefore, deepens the government’s budget financing difficulties, which have now seen the Treasury raise a net of Sh122.4 billion from the domestic market since July, against a pro-rated target of Sh192.9 billion by end of October.

In the current fiscal year, the government is targeting Sh578.6 billion from the domestic debt market, as part of the financing of an Sh845 billion budget hole.

External borrowing has also proven difficult for the State, due to elevated rate demands on Eurobonds and syndicated loans by investors who are now getting higher returns from safe haven western markets.

In response to the borrowing difficulties and mounting debt servicing costs, President William Ruto has ordered ministries to cut the current year’s recurrent expenditure by at least Sh300 billion.

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