The Central Bank of Kenya (CBK) has reopened a 10-year bond first sold in March, looking to use the paper to pull interest rates lower and push investors back to longer-term bonds.
The Treasury is targeting Sh25 billion from the bond, which is being sold against a backdrop of falling rates, on account of the Treasury closing in on its domestic borrowing target for the fiscal year and expected inflows from external lenders.
The bond carries a coupon of 16 percent, which was set by the CBK in the initial March sale, as a signal to the market that it expected rates to come down from the prevailing highs of 18.5 percent at the time.
After assigning a coupon rate ahead of the sale of a new bond, as opposed to letting the market determine the rate as has been customary, the CBK followed up by rejecting the bulk of bids that strayed significantly from its preferred 16 percent level.
In that March sale, investors asked for an average of 17.76 percent on bids worth Sh23.9 billion, but the CBK took up only Sh4.84 billion, at an average rate of 16.52 percent.
The difference between the yield and the coupon was made up by a discount in price, where accepted bids were priced at Sh97.50 per unit of Sh100.
Given that the bond is currently trading at a price of Sh99.48 per Sh100 in the secondary market (equivalent to a yield of 16.2 percent), the CBK is likely to settle for a lower rate compared to the March issuance. The sale of the reopened bond started on Thursday (April 25) and will close on May 2.
The CBK will also likely lean on the knowledge that the government is ahead of target in its domestic borrowing programme for the fiscal year, and is largely now borrowing to cover maturities.
Analysis by NCBA Capital shows that the government has so far netted Sh464.9 billion from the domestic market in the current fiscal year, representing 98.6 percent of the target of Sh471.36 billion.
Heavy maturities of Sh369 billion in May and June will however limit the CBK’s headroom in cutting rates.
The State normally refinances maturing domestic debt through new issuances that allow investors to roll over their dues into new securities.
The CBA analysts however expect that the bulk of the maturities are likely to be raised via an infrastructure bond, rather than an ordinary bond such as the one being sold currently.
The underperformance of revenue collections is also a factor, although the Treasury has the opportunity to adjust expenditure via the Supplementary Budget which is expected any time now.
Exchequer filings show that the government had collected a total of Sh1.587 trillion in taxes and non-tax revenue in the nine months to March 2024, against a prorated target of Sh1.932 trillion. The target for the full year stands at Sh2.577 trillion.
