The Central Bank of Kenya (CBK) has raised Sh130 billion for the government from two reopened infrastructure bonds (IFBs) whose auction closed on Wednesday, after investors oversubscribed the offer amid expectations of interest rates coming down in the near term.
The reopened IFBs on sale comprised 14-year and 17-year papers which were initially sold in November 2022 and March 2023 respectively.
Buyers offered the Central Bank of Kenya (CBK)—the government’s fiscal agent— a total of Sh193.9 billion against a target of Sh70 billion, eyeing the relatively high coupon rates on the papers (compared to prevailing secondary market yields).
The 14-year bond, which carries a coupon of 13.938 percent, attracted bids worth Sh93.13 billion, while the 17-year paper, with its coupon of 14.399 percent, had bids of Sh100.77 billion.
The CBK split the acceptances almost evenly across the two bonds, taking Sh65.26 billion on the 14-year and Sh65.55 billion on the 17-year option.
The sale of the bonds against a background of last week’s 0.5 percentage point base rate cut by the CBK meant that investors were likely to rush for the papers before the rate cut filters through to the market.
The CBK also cut the cash reserve ratio for banks—the share of customer deposits they are required to deposit at the CBK as reserves — from 4.25 percent to 3.25 percent. This will effectively release an additional Sh57 billion worth of liquidity for lending, some of which might fund its way into the bond market and contribute to a further fall in rates.
“While high appetite for IFBs is often the case, this auction also showed investors’ comfort with lengthening duration in a bid to lock in current higher yields given that interest rates are on a continuous decline,” said analysts at Sterling Capital.
“We also note a relatively high rejection rate of 33 percent with Sh63.1 billion worth of bids rejected as CBK continues to tame aggressive bidding to lower borrowing costs despite the government’s high budgetary requirements as shown in the recently announced supplementary budget II (numbers).”
The Supplementary budget II is expected to raise the expenditure for the current fiscal year by Sh199.9 billion, pointing to an upward revision of the borrowing targets given the continued underperformance of tax collections.
The bonds' proceeds are also likely to back the government’s Sh50 billion partial buyback of three other bonds that are due to mature in April and May this year.
The papers targeted in the buyback are a three-year bond which was first issued on April 11, 2022, a five-year bond sold on May 11, 2020 and a nine-year infrastructure bond whose debut sale was on May 23, 2016.
The three-year paper is set to mature on April 7, the five-year on May 5, and the infrastructure bond on May 12. The combined outstanding value of the three bonds is Sh185.05 billion, meaning that the government is looking to buy back 27 percent of the face or par value of these papers in the exercise which closes on Monday.
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