The Treasury is set to introduce an issuance threshold of Sh50 billion for local bonds under proposed measures meant to strengthen the efficiency and reduce the cost of the government’s domestic borrowing.
The reforms, which are backed by the World Bank as part of a package tied to the Development Policy Operations (DPO) financing programme currently underway, are emphasising strengthening of benchmark bonds which will set performance standard for other bonds in terms of pricing and evening out liquidity.
The reforms are also expected to improve the yield curve, which guides pricing of debt issuances, including those by private companies looking to tap the capital markets for funds.
The Central Bank of Kenya (CBK), which is the government’s fiscal agent, has in the past few years made an effort to improve the yield curve, mainly by ensuring new offers are within the curve and rejecting majority of bids deemed too expensive.
“The measures also support overall capital market development and deepening, particularly as a higher quality yield curve will provide better price discovery and improved pricing as to the long-term risk-free rate and cost of capital in Kenya,” World Bank analysts said in a report for the approval of the DPO facility.
“The results indicator measures increased liquidity concentration and reduced fragmentation in the curve, through an increase in minimum benchmark size, aiming for all marketable bonds with a remaining maturity of up to five years to have a minimum issuance size of at least Sh50 billion and for bonds with a remaining maturity of more than five years to have a minimum issuance size of at least Sh75 billion.”