The Central Bank of Kenya faces a test of its resolve to keep a lid on the cost of government borrowing in the ongoing sale of the Sh35 billion January 2024 Treasury bond, which is the first to be floated since the regulator raised the base lending rate by two percentage points.
The CBK has split the sale into two tranches, comprising a new three-year bond and the third re-opening of a five-year bond first sold in July.
The interest rate on the three-year paper will be market-determined. On the five-year paper, the coupon in its original sale was 16.84 percent, but two subsequent reopenings in August and October saw rates go up to 17.95 percent and 17.99 percent respectively.
Cumulatively, the five-year paper has raised Sh50 billion from the three sales, and two tap offers in July and August.
The raising of the base rate is now expected to make investors bid more aggressively on the two bonds. In the October sale of the five years, the average rate demanded by bidders was 18.46 percent.
“We are likely to see a steeper inversion of the yield curve, as a response to the base rate increase to 12.5 percent. If they did a long term bond, which is unlikely, it would lead to a flattening of the yield curve but that would be too expensive for the exchequer,” said Ronnie Chokaa, an analyst at AIB-AXYS Africa, an investment bank.
“We foresee the government tapping the short end for at least the next six months or until the US Federal Reserve starts to cut its rate next year.”
The pricing of the tax-free infrastructure bond (IFB) sold last month is also likely to factor in bid pricing for the January sale.
The IFB, whose primary and tap sales were done before the base rate increase, is paying an interest of 17.93 percent. Effectively, for a taxed bond, an investor would demand 21.1 percent in order to get a net return equal to that of the IFB.
Such elevated returns will deepen the Treasury’s headache over the rising cost of servicing domestic debt, while at the same time raising enough new funding to fill the budget deficit.
The latest exchequer report shows that the government spent Sh517.1 billion servicing domestic debt between July and November —both in interest and principal payments.
At the same time, the government has revised its 2023/2024 net borrowing target from the domestic market to Sh471.4 billion from Sh415 billion, piling more pressure on the CBK to relax its usually strict stance against accepting expensive bids in the monthly bond sales.
