Capital Markets

CBK leans on 3-year bond to boost domestic borrowing


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

The Central Bank of Kenya (CBK) has offered its new three-year bond for the third time this month as it seeks to reap from sustained investor interest in the paper from the previous two issues.

The second tap sale of the bond will run until Friday this week with takers of the paper expected to attach a small premium to the 14.228 percent yield with the government eyeing Sh20 billion from the auction.

CBK’s double tap sale points to the government’s increased dependence on the new bond to scale domestic borrowing outside Treasury bills for the fiscal year ending on June 30.

At the primary sale (first auction), the three-year bond became the first fully subscribed paper this year, outside the infrastructure bond as investor bids beat the Sh20 billion target at Sh20.74 billion to represent a 103.72 percent performance rate.

The apex bank later opened a tap sale following the successful primary auction and registered bids totalling Sh10.6 billion to surpass the target of Sh10 billion.

Combined, the government realized Sh30.9 billion from the two previous auctions and channelled the funds towards new borrowing and redemptions.

Analysts have attributed the sustained appetite for the new three-year paper to investors' preference for short-dated papers with the tenure of the bond having fallen outside that of traditional longer-dated benchmark bonds.

Read: Treasury back to market with a Sh20 billion bond

“We attribute the over performance (of the tap sale) to investors continuing to see the market’s short-term risks, hence the high appetite for shorter dated papers,” analysts at AIB-AXYS Africa said in a note.

Until May’s bond issuance, investor interests had been removed from the bonds market with participants opting to instead pitch camp in the weekly Treasury bills auction in a flight to duration risks presented by longer-dated issues.

Investors have shunned bonds in a rising interest rate environment as interest rates on yield-bearing assets reset upwards driven in most part by rising inflation exposing buyers to potential mark-to-market losses as bond prices move in the opposite direction.

At the same time, investors have preferred risk-adjusted returns to further push up yields on both Treasury bills and bonds.

Despite the rebound in bond interest through the three-year paper, Treasury bills remain heavily oversubscribed with investors mostly biased towards the short-ended 91-day Treasury bill.

In last week’s auction, for instance, the 91-day paper recorded a 602.3 percent subscription rate with bids received at Sh24.1 billion against a target of Sh4 billion.

Rising yields on the short-timed papers are expected to continue galvanizing investor interest.

Read: CBK eyes Sh20bn in reopened March infrastructure bond

“We expect continued preference towards the 91-day paper given the rising yields which as expected have crossed the 10 percent level. Yields on all the papers are now firmly above 10 percent,” analysts at AIB-AXYS Africa added.

The government is expected to remain under pressure in meeting its domestic borrowing targets with receipts at the end of April having stood at a mere Sh406.6 billion against a Sh886.5 billion target by the close of June.

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