The Central Bank of Kenya (CBK) has asked investors holding a five-year Treasury bond that matures in November to switch to a longer 15-year paper that has 8.3 years to maturity, marking the second bond swap issuance in the current fiscal year.
The swap sale is targeting Sh15 billion out of the five-year paper’s outstanding Sh66 billion. The bond was issued in November 2021, at a coupon or annual interest rate of 11.27 percent.
A switch bond issuance involves the direct conversion of maturing Treasury bills and bonds into a longer term security, cushioning the exchequer from a liquidity crisis.
Investors who take up the offer to roll over their holdings will get to earn a higher coupon of 12.34 percent on the 15-year bond, which was initially issued in July 2019 and has Sh74.28 billion in outstanding value.
They will also benefit from a lower withholding tax rate of 10 percent on the destination bond, compared to their current rate of 15 percent on the five-year paper which pays interest of 11.277 percent.
Bonds of a tenor longer than five years are charged a withholding tax of 10 percent on interest, while those of a shorter duration, and Treasury bills, are levied 15 percent. Infrastructure bonds are exempted from these taxes, regardless of duration.
“Eligibility is open only to investors with unencumbered holdings in Treasury bond issue number FXD 1/2021/005 as at March 16, 2026,” said the CBK in the switch bond prospectus.
This is the second time in the current fiscal year that the government is looking to refinance a bond that has a near-date maturity with a swap sale.
In January, holders of a 10-year bond that is maturing in August 2026 agreed to roll over Sh25.17 billion worth of their paper into a 15-year bond that was issued in April 2022, giving it a period to maturity of 11.3 years.
Following the auction, the 10-year bond that has a coupon of 15.04 percent, saw its outstanding amount fall from Sh103.4 billion to Sh78.2 billion, while the outstanding amount on the 15-year bond whose coupon is 13.94 percent rose to Sh154.37 billion, from Sh129.2 billion.
Domestic debt maturities are usually funded by rolling over the debt via new bond issuances, and rarely through repayments from tax collections since the government is already running a budget deficit.
Refinancing the debt through ordinary bond sales however means that rollovers can affect the government’s ability to make new borrowing for budgetary purposes, especially when these bonds are undersubscribed.
Swapping a bond therefore helps avoid the competition for funds between maturities and new borrowing.
The Treasury’s 2025-2026 annual borrowing plan indicates that the government intended to issue six switch bonds between September 2025 and June 2026, targeting total maturities of Sh555.5 billion.
The first of these bonds was a Sh77 billion, three-year paper that is due to mature in May 2026, but the government instead opted to do a partial buyback of Sh20 billion on the paper in December, reducing its outstanding value to Sh57 billion.
Three other bonds lined up for early refinancing include a Sh73.4 billion, 10-year paper that matures in August 2016, a three-year bond coming due in January 2027 that has an outstanding value of Sh91.6 billion, and a Sh144.4 billion, 15-year paper that matures in September 2027.
