Capital Markets

CBK in a rare bond cancellation

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The Central bank of Kenya, Nairobi. FILE PHOTO | NMG

The Central Bank of Kenya (CBK) has been forced to cancel the issuance of a reopened 15-year bond whose sale closed on Tuesday, deepening the government’s recent struggles to raise debt financing from the local market.

The poor performance could see the Treasury raise pressure on the Kenya Revenue Authority (KRA) to beat collection targets or a higher leverage on external financing to close the budget funding gap.

This week’s sale comprised the reopening of a 15-year bond first sold in 2019 and a three-year paper first sold last year, seeking a total of Sh30 billion.

The three-year bond raised just Sh1.76 billion, with the underperformance and the cancellation of the 15-year blamed on aggressive rate demands from investors amid a liquidity squeeze in the money market.

Earlier in the month, the Treasury had auctioned the first tranche of this month’s bond issuance—a 10-year reopened paper targeting Sh20 billion— raising just Sh3.6 billion.

It also failed to hit the target with a tap sale on an infrastructure bond it had first floated in March, raising Sh5.1 billion out of a target of Sh10 billion.

Analysts said despite the market seeing tight liquidity, the likeliest reason for the bond cancellation was aggressive investor bids which were viewed to be untenable by the government, rather than a lack of interest to lend by investors.

“The cancellation of the bond is likely a result of overly aggressive bids from investors with the government striving to control the high yields,” noted a market analyst.

The three-year paper received bids worth Sh7.3 billion at a market-weighted rate of 13.8 percent against a coupon rate of 11.8 percent.

There were no additional details from the Central Bank of Kenya concerning the cancelled 15-year tranche.

The low acceptance from the bond auction continues to pile pressure on the exchequer’s domestic borrowing targets for the 2022/23 fiscal year with only a little over two months to the end of June.

Investor expectations for higher interest rates from bond issues have seen them keep off the market, leaving the government behind its borrowing target amid revenue underperformance from taxes.

Analysts expect though that investors will show up in this week’s Treasury Bills auction, to continue the preference of park funds in short-dated papers due to uncertainty about interest rates in the market.

According to data from the National Treasury, domestic borrowing through nine months to March stood at Sh396.3 billion against a target of Sh886.5 billion which is inclusive of rollovers.

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