The government will be forced to accept expensive bids in this month’s Sh50 billion bond sale, which analysts expect will be undersubscribed due to tight liquidity in the market and lower interest from banks.
The three-tranche bond, whose sale closes Tuesday, consists of a three-year paper first sold in April 2022, a 10-year offer first floated in 2019, and a 20-year one whose initial sale was in 2021. They, therefore, have terms to maturity of 2.7 years, 6.7 years, and 19.1 years respectively.
They have fixed interest rates of 11.76 percent, 12.3 percent, and 13.44 percent respectively, with potentially higher returns to be offered through discounts on invested amounts.
The Treasury is hoping that the big variance in tenors will attract a larger number of bids, given that it caters to the demands of banks which prefer short-tenor papers and pension funds whose preference is long-dated bonds.
Lenders have, however, been keeping an eye on rising yields, which lower the value of their bond holdings and are therefore likely to curb their appetite for new offerings.
“We expect an under subscription largely on account of tightening liquidity in the money markets coupled with uncertainty in the general elections,” said stockbroker AIB-AXYS Africa in a pre-auction note.
“We suspect that most banks have slowed on taking up government debt as it exposes them to fair value losses due to the rising yields and the private credit sector has shown signs of recovery,” AIB-AXYS added that upcoming maturities and interest payments of Sh70.9 billion this month puts pressure on the Treasury to accept expensive bids in the auction.
Recent bond issuances have also struggled to hit their targeted amounts, including the tap sale of June’s infrastructure bond which realised Sh6.4 billion out of the sought Sh20 billion, despite its tax-free status and a coupon of 13.74 percent.
July’s bond sale of two reopened 15-year papers also fell well short of the target, raising Sh9.3 billion out of a targeted Sh40 billion.