The Central Bank of Kenya (CBK) is seeking to raise Sh50 billion from the sale of two reopened bonds in October, sticking to auctions of long-term securities to reduce maturity risk.
The government’s fiscal agent is offering a 15-year paper with a coupon (fixed interest rate) of 12.65 percent and a 20-year bond with a coupon of 13.444 percent.
Interest on both bonds attract a withholding tax of 10 percent. The 15-year bond, which was first auctioned in 2018, has 7.7 years left to maturity.
The 20-year paper, first sold in 2021, has 15.9 years to redemption. The bonds are on sale until October 15.
The CBK has relied heavily on reopening of long term bonds in the wake of a significant decline in interest rates.
The strategy is aimed at giving the government better control of its borrowing costs while simultaneously helping to avoid the risk of too many securities maturing in the near term.
The interest on the reopened bonds is already set though investors can get higher returns should the CBK decide to issue a discount, depending on the bids and the government’s borrowing plan.
Interest rates have fallen from a peak of 18.46 percent early last year when investors locked in the return through an infrastructure bond sold in February 2024.
Interest rates had been rising steadily as the CBK sought to contain inflation and arrest the depreciation of the shilling which hit lows of Sh163 in January 2024, according to market rates.
Higher interest rates have the effect of attracting foreign capital inflows into the domestic debt markets, supporting the local currency. They also make it costlier to borrow for investment or consumption, helping to contain inflation.
The shilling made major gains from February 2024 after Kenya successfully repaid part of a Eurobond, ending fears that the country would default.
The shilling’s rally –that has seen the CBK manage it at a rate of Sh129.2 to the US dollar— and a decline in the cost of living to low single digits has allowed the monetary authority to lower interest rates significantly.
At current levels, the returns on long term government bonds are still substantially higher compared to other fixed income assets.
This has seen investors including pension funds and insurers offer the CBK more than its borrowing target in monthly bond auctions, with the government’s fiscal agent frequently accepting more than it originally planned.
The interest rate on Treasury bills has plunged from highs of 16.9 percent in February last year to lows of 7.9 percent in the latest auction. Bank fixed deposit accounts are meanwhile giving average returns of 8.07 percent as of July disclosures.
This means that long term bonds are offering excess returns of more than four percentage points, making them attractive for investors willing to lock their capital for years.
Pension funds, insurers, investment firms and high-net-worth individuals are among the regular buyers of the long term sovereign securities in a market where the popularity of corporate bonds declined in the wake of defaults and fraud.
Participation of retail investors in treasuries has also exploded after the CBK launched a digital platform –DhowCSD— that automates placement of bids and rollovers, among other functions.
The CBK has moved to further make it easier for retail investors to invest in the securities with a planned system upgrade that will also enable payments.
