Bond buyers pushed back against the Central Bank of Kenya’s (CBK) efforts to lower domestic interest rates with an undersubscription of the reopened 10- and 20-year bonds that closed on Wednesday.
Investors offered the government Sh22.64 billion against a target of Sh30 billion, of which the CBK took up Sh19.28 billion as it left bids deemed expensive on the table.
The bond sale, which ran between September 4 and 18, 2024, was seen by analysts as a test of the market’s willingness to follow the CBK’s expectation that interest rates should now fall in line with improved inflation and exchange rate conditions.
The CBK signalled that it expects domestic interest rates to go down with its 25-basis point rate cut to 12.75 percent at the last Monetary Policy Committee meeting in August.
The reopening of longer-dated bonds, which have a relatively lower coupon than the prevailing market yields also allowed the CBK to gauge the risk perceptions on government debt, with investors likely to commit funds for longer if they have certainty on the State’s fiscal position and policies.
“We expected the issues to be undersubscribed due to the three-reopenings that already happened on the 10-year (bond) in the six months since its initial issuance,” analysts at Sterling Capital said in a note on the bond.
“The relatively long duration on the 20-year would not be attractive to investors as most are seeking to keep the duration short given the high interest rate environment.”
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 issue by the CBK this year.
In the latest sale, the paper attracted Sh13.4 billion in bids, of which the CBK accepted Sh11.6 billion.
Each of the previous issuances of the bond was also undersubscribed, indicating investor dissatisfaction with the return on offer. The bond, which carries a coupon (actual payable interest rate) of 16 percent, returned an average yield of 16.87 percent on accepted bids in the September sale, resulting in a price discount of Sh4.05 for every unit of Sh100.
The 20-year bond, which was first sold in September 2016, raised bids of Sh9.25 billion, and acceptances of Sh7.7 billion. The effective yield on accepted offers was 17.28 percent compared to the bond’s coupon of 14 percent, with the CBK offering a discount of Sh16.14 per unit of Sh100 to make up for the difference.
By demanding the premium, investors indicated that they remain wary of the government’s fiscal shortfalls, which have been amplified by the recent rejection of the Finance Bill 2024 and a possible rollback of tax changes implemented by the Finance Act 2023.
The collapse of the Finance Bill 2024 forced the Treasury to adjust its domestic net borrowing target to Sh413 billion from the initial Sh263.2 billion in 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 State adjusting the borrowing plans down the road through supplementary budgets.
