September’s bond sale which closes on Wednesday is set to test the expectations that interest rates have peaked after the recent fall in inflation and stability of the exchange rate.
The Central Bank of Kenya (CBK) signalled that it expects domestic interest rates to go down with its 25-basis point rate cut to 12.75 percent in the last monetary policy committee meeting in August.
Analysts expect investors to test this resolve in the sale of reopened 10 and 20-year bonds, which carry coupons (fixed interest rates) of 16 and 14 percent respectively.
According to analysts, reopening longer dated bonds that have a relatively lower coupon than the prevailing market yields also allows the CBK to test the markets willingness to offer the government cash on cheaper terms.
“We see gradual downward pressure in rates —even if not so much on the September sale— taking into account that inflation has fallen to the target level and the MPC’s signalling that it is on an easing path,” said Churchill Ogutu, an economist at IC Group (Mauritius).
He added that the government’s expanded domestic borrowing target following the rejection of the 2024 Finance Bill provides the main risk to the CBK’ s efforts to bring down interest rates.
The Treasury adjusted the domestic net borrowing target to Sh413 billion from the initial Sh263.2 billion as per the 2024 budget statement.
This was after the government adjusted the total fiscal deficit for the year to Sh773 billion from Sh597 billion to cover for the expected fall in taxes.
There is also uncertainty over the government’s ability to meet its tax collection target, raising the prospect of the government adjusting the borrowing plans down the road through supplementary budgets.
This uncertainty could see investors continue demanding a premium from the CBK in bond auctions.
Sterling Capital analysts see bidding for the 10-year paper at between 16.74 and 16.94 percent, and 16.89 to 17.09 percent for the 20-year bond. At AIB AXYS Africa, the bidding expectation for the 10-year is between 16.4 and 16.99 percent, and between 16.75 and 17.25 percent for the 20-year.
The 10-year paper was initially sold in March 2024, followed by a tap sale in April and subsequent reopenings in May, June and July, making it the most tapped issuance by the CBK this year.
Each of the five issuances of the bond have been undersubscribed however, indicating investor dissatisfaction with the return on offer. The 20-year bond was first sold in September 2016, and this marks the first time it has been reopened by the CBK.
