The Central Bank of Kenya (CBK) rejected Sh19.7 billion from bond bidders in its October auction as it continues efforts to bring down domestic interest rates in a bid to reignite economic growth.
The bond sale was also seen as a test of the CBK’s resolve to cut the high cost of the government’s domestic borrowing after rates rose sharply over the past year to touch highs of 18.5 percent on short-term bonds.
The offer comprised two reopened 10-year papers first sold in 2016 and 2022, which carried coupons (actual interest rate) of 15.04 percent and 13.49 percent respectively.
Analysts had projected that bidders would ask for relatively higher returns on the bonds, in line with recent auction trends, partly to lock in attractive returns before rates come down after the CBK cuts its indicative lending rate by 75 basis points on Tuesday.
At the same time, there was an expectation that the CBK would reject expensive offers, partly to back its stance on lowering rates and also the fact that the State is within its targeted domestic borrowing range.
Investors offered the government Sh50.96 billion in the bond sale that sought Sh30 billion, with the CBK taking up Sh31.27 billion.
This allowed the monetary regulator to keep the effective yield of the bonds below 17 percent, even as investors demanded average returns of 17.06 percent and 17.34 percent on the 2016 and 2022 bonds respectively.
The rate of return earned by investors does not have to match the coupons since the CBK offers discounts when a lower-yielding security is reopened in a high-interest-rate environment.
The bond discounts serve to lift the effective rate of return since the interest is paid on the face value of the bond and an investor will also be paid the full principal at redemption despite paying a lesser amount when buying the bond due to the discount.
In the October bond sale, the CBK offered a discount of Sh1.63 and Sh8.80 per every unit of Sh100 on the 2016 and 2022 papers respectively, after the average yield on the two papers settled at 16.08 percent and 16.95 percent.
In comparison, a 20-year bond sold last month (with a period of 12 years to maturity) and a coupon of 14 percent saw acceptances at an average yield of 17.35 percent, indicating that the CBK has this time round lowered the rate at which it is willing to accept money from investors.
Speaking after the MPC meeting, CBK governor Kamau Thugge said that lowering the cost of funds in the economy will help improve lending to the private sector whose annualised rate of growth fell to 1.3 percent in August, compared to 13.9 percent at the beginning of 2024.
The CBK considers a credit growth rate of 12 to 15 percent to be the optimum level to fuel the healthy growth of the economy, giving businesses enough capital to make new investments that create jobs and expand tax revenue.
