October’s infrastructure bond whose sale concluded this week is now paying the highest interest among outstanding government securities issuances at nearly 14 percent after the Central Bank of Kenya softened its hard stance against accepting high priced bids in the monthly auction.
The results of the sale that were published yesterday by the CBK show that the 14-year bond, which had targeted Sh60 billion, realised investor bids worth Sh91.8 billion, out of which the government took up Sh75.6 billion.
The average rate of the accepted bids was 13.94 percent, against an average of 14.03 percent demanded by investors.
The rate beats that of the 18-year infrastructure bond sold in June this year, which is paying interest at 13.74 percent. A 10-year bond sold in 2016 has a coupon of 15.04 percent, but its interest payments are subject to withholding tax, which reduces the net interest to 13.53 percent.
Recent bond sales have been underperforming due to the rate standoff between the CBK and investors, who have demanded that the government pays more to reflect global trends of rising interest rates and to cover against higher inflation and currency depreciation.
But the fact that the CBK exceeded its targeted take by Sh15 billion indicates that the need to ramp up domestic borrowing is taking precedence over concerns about paying higher rates for new issuances, even though the 53 percent oversubscription in the October infrastructure paper gave the regulator some room to filter out the more expensive offers.
“Across the curve, yields are anticipated to trend higher, although the central bank's efforts to quell expensive bids should moderate the upward adjustment. However, as the sovereign's credit options diminish, it may become more willing to accept higher interest rates,” said analysts at NCBA in a fixed income note.
The Treasury has been lagging on a pro-rated basis in its domestic borrowing target for the fiscal year, where it is targeting Sh578.6 billion. By the end of last week, analysis by NCBA researchers shows, it had raised a net of Sh68 billion or 12.6 percent of the target, against an expected Sh192 billion.
The performance of the October paper, therefore, offers a welcome signal to the government that the market is once again showing comfort with the rates on offer, but this will be tested next month when the bond issuance will not carry the tax benefit of an infrastructure bond.
Infrastructure bonds are typically oversubscribed due to their tax-free status. 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 borrowing from external sources untenable for the country, aside from concessional loans from the World bank and the International Monetary Fund (IMF).
