Interest rates on long term bonds have fallen sharply in the wake of last week’s base rate cut by the Central Bank of Kenya (CBK), and improving macro-economic conditions, offering relief to the government while hitting income focused investors.
The 10-year bond whose sale closed on Wednesday saw investors taking an effective return of 14.68 percent on accepted bids, against the paper’s coupon (or actual interest rate) of 16 percent.
This means that they will pay a premium on the face value in order to secure the bond. The successful bidders averaged a price of Sh113.83 for every unit of Sh100 on the paper.
The bond was first sold in March this year, with an average yield of 16.51 percent. It was subsequently reopened in May (yield of 16.23 percent), July (16.59 percent), September (16.86 percent) and November (15.85 percent).
Its falling yield indicates that investors are now happy to take a lower return to lend to the government for a 10-year period compared to what they were willing to take earlier this year.
The CBK has been signalling lower rates to the market by bringing down its base rate from 13 percent to 11.25 percent through three straight cuts since August.
The bond has also been sold in a period of elevated liquidity in the market, and high demand for government securities from investors who are looking to lock in the present rates before returns contract further.
Investors put up bids worth Sh53.88 billion on the bond, which was more than double the government’s target of Sh20 billion, with the CBK taking up Sh43.7 billion.
The oversubscription meant that the December bond issuance, which consisted of three reopened papers, raised a total of Sh97.1 billion for the Treasury against a target of Sh45 billion.
The other two papers —a 10-year bond first sold in 2023 and a 20-year paper initially floated in 2018— were auctioned last week, raising Sh53.4 billion from bids of Sh71.3 billion.
These papers, whose auction closed before the latest Central Bank Rate (CBR) cut, however offered yields that were higher than their coupon rates.
The 2023 bond, which carries a coupon of 14.15 percent, sold at an effective yield of 14.69 percent, while the 20-year bond’s yield came in at 15.1 percent versus a coupon rate of 13.2 percent.
