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Investors go for longer term bond in hunt for yields
Investors have been keen on locking in any bond offering a relatively high coupon amid falling interest rates, regardless of tenor, as general interest rates in the fixed income market continue to fall.
Treasury bond investors shunned the reopened 30-year paper in the dual tranche December auction, opting for the 25-year bond that pays higher annual interest.
In the sale that targeted Sh40 billion, the Central Bank of Kenya (CBK) reopened a 25-year bond that was first sold in May 2021, at a coupon of 13.92 percent, and a 30-year bond first sold in February 2011 that pays annual interest of 12 percent.
Investors offered a total of Sh53.13 billion in the auction, with CBK taking up Sh47.1 billion. The 25-year bond accounted for the bulk of the activity with bonds valued Sh48.5 billion and an acceptance of Sh43.2 billion, while the 30-year bond realised Sh3.9 billion from Sh4.59 billion offers.
The 30-year bond, dubbed a Savings Development Bond (SDB) when it was floated in 2011, was most recently reopened in September, when it raised a modest Sh2.4 billion against a target of Sh20 billion.
It was also reopened in June this year alongside a 15-year bond from 2020 that carried a coupon of 12.75 percent.
The SDB netted Sh13.8 billion from Sh16.6 billion bids in this sale, where it was outperformed significantly by the 15-year paper which raised Sh57.9 billion from bids of Sh84.7 billion.
Investors have been keen on locking in any bond offering a relatively high coupon amid falling interest rates, regardless of tenor, as general interest rates in the fixed income market continue to fall.
The maturity profile of these bonds would have appealed to buyers who normally have a long investment profile such as pension funds, but retail investors also bought in as returns from other assets such as Treasury bills, unit trusts and fixed bank deposits continue to trend lower.
The general decline in interest rates has tracked the easing of the CBK’s monetary policy committee, which has cut rates in its last eight meetings held since August 2024.
The Central Bank Rate (CBR) currently stands at 9.25 percent, having been cut by 0.25 percentage points in the latest meeting on October 7. The CBR stood at 13 percent before the current easing cycle started in August 2024.
The CBK has been taking advantage of the willingness by investors to lend long term against favourable coupon rates to lengthen the maturity profile of domestic debt while running ahead of the year’s borrowing target.
In November, the CBK carried out two separate issuances in which it reopened four papers, comprising a pair of 15-year bonds that had 8.7 years and 11.4 years to maturity, a 20-year bond with seven years to maturity and a 25-year bond that had 21.9 years until it falls due.
These bonds pay investors interest at rates of between 12 and 14.2 percent, which is well above the rates of between 7.8 percent and 9.4 percent that are available on short term Treasury bills.
Investors offered the government a cumulative Sh208.75 billion in the two issuances, with the CBK taking up just over half of this amount at Sh107.6 billion.
