The Central Bank of Kenya (CBK) is selling a 14-year infrastructure bond, seeking to raise Sh60 billion from the paper on which investors will not pay taxes on interest received.
The bond, part of which will be redeemed early, is on sale until November 8. The interest rate on the security will be determined by the market. Bond investors have been pressing for higher interest rates on new sales of government debt securities.
The bidding for higher interest rates comes amid rising inflation and the weakening of the Kenya shilling – two factors that erode the value of portfolios of fixed-income investors.
The cost of living measure rose to 9.2 percent last month, up from 8.5 percent in August. The shilling, on the other hand, has depreciated to trade at 121 units to the US dollar, with most of the weakening happening over the past nine months.
The infrastructure bond with the highest interest rate is the 19-year paper auctioned in February this year having a coupon of 12.965 percent.
The new paper currently on sale comes at a time when CBK has caved to investors’ higher interest demand by accepting bids above 14 percent during its last concluded auction.
The CBK had been holding out against surpassing the 14 percent threshold average coupon or interest rate in recent bond sales, leading to a significant volume of rejected bids.
The new infrastructure bond matures on October 27, 2036.
Half of the value of the securities will, however, be repaid midway on November 4, 2030 — a date on which small investors will also be redeemed in full for amounts of up to Sh1 million per account.
Infrastructure bonds are typically oversubscribed due to their tax advantage. Interest income on other government bonds is taxed at a rate of between 10 percent and 15 percent depending on duration.
The government has relied on domestic borrowing to plug the budget deficit after rising interest rates in developed economies made it unfavourable to issue a new Eurobond.