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Investors switch Sh25bn into lower-return bond
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.
Investors who held a 10-year bond maturing in August 2026 agreed to roll over Sh26.49 billion of their paper into a 15-year bond in the current fiscal year’s first switch bond issuance.
The Central Bank of Kenya (CBK) said that it accepted rollovers of Sh25.17 billion against its target of Sh20 billion. The 15-year paper, which is known as a destination bond, 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 fixed interest rate of 15.04 percent will see 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 rises to Sh154.37 billion from Sh129.2 billion.
According to analysts, the oversubscription on the sale was as expected, given the falling interest rates that have made high paying bonds trade at a premium in the market.
“This was in line with our expectations and reflects the low target amount of Sh20 billion, as well as limited high yield fixed income investment opportunities,” said analysts at Sterling Capital in a note on the switch bond result.
“The switch secures 13.94 percent coupon for investors for a longer investment horizon, in a declining interest rate environment, while foregoing the final year's 15.04 percent coupon on the maturing 10-year bond.”
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 in the short- term.
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 lined up for a switch was a Sh76.5 billion, three-year paper that is due to mature in May 2026, but the government instead opted to do the partial buyback of Sh20 billion on the paper in November 2025, reducing its outstanding value to Sh56 billion.
The other bonds targeted for switching include a five-year bond maturing in November 2026 (Sh66.1 billion), a three-year bond maturing in January 2027 (Sh91.6 billion) and a 15-year paper maturing in September 2027 (Sh144.5 billion).
Switch bonds are however a relatively recent debt management tool. The Treasury brought its first such bond in June 2020, offering investors a six-year infrastructure paper in exchange for a maturing one-year Treasury bill. This netted Sh20.2 billion out of a target of Sh25.6 billion.
The second switch bond was sold in December 2022, seeking Sh87.8 billion via a six-year infrastructure bond, targeting holders of maturing Treasury bills worth Sh31.96 billion and a maturing two-year bond which had an outstanding amount of Sh55.85 billion.
This bond raised Sh47.8 billion, with holders of the two-year bond accounting for the bulk of the switch at Sh39 billion.
