Capital Markets

Treasury leans on four short term bonds to raise Sh222bn


Cabinet Secretary for National Treasury and Economic Planning Prof Njuguna Ndung'u before the Committee on County Public Investments and Special Funds at KICC, Nairobi on April 24, 2023. PHOTO | DENNIS ONSONGO | NMG

The National Treasury has leaned on multiple reopenings of four short-term bonds to raise Sh222 billion since May, seeking to avoid committing to high-interest rates for the long term.

The bonds, with a duration of maturity of between two and five years, are paying elevated interest rates of up to almost 18 percent, which is nearly four percentage points higher than the yields that were being demanded for this duration three months ago.

The bonds being revisited include a 10-year paper first issued in August 2016, which has three years to maturity.

Read: Why Treasury is hesitant to sell long-term bonds

The bond, which had raised Sh18.3 billion when first sold seven years ago, was reopened in July, raising Sh15.7 billion, before a tap sale on that reopening netted the government a further Sh31.23 billion.

The same paper was then reopened for the second time this month in a sale concluded on Wednesday, which saw it net Sh6.6 billion.

A three-year bond whose initial sale was in May, when it raised Sh20.3 billion, was tapped thrice before the end of June, raising another Sh56.4 billion for the exchequer.

In July, the government made a primary sale of a five-year bond, which was followed by a tap sale. A reopening of the paper in August was also accompanied by a tap sale, bringing the total take from the bond to Sh48.6 billion in the four sales.

A two-year bond initially floated last month has also been revisited twice, once in a tap sale and through a reopening this month, with a total subscription of Sh44 billion from the sales.

Aside from the short-duration bonds, the State also netted Sh213.4 billion from a seven-year infrastructure bond in June.

The State’s decision to use a limited number of short-dated bonds for budgetary financing has reduced the duration of exposure to high-interest rates.

Investors have been seeking higher rates aggressively, for instance demanding up to 18.5 percent on average in the September reopening of the 10-year bond, and 17.58 percent for the two-year reopening.

Aggressive bidding

The bids on these bonds stood at Sh34 billion, but the Central Bank of Kenya (CBK) only took up Sh21.6 billion, at average rates of 17.92 percent and 17.45 percent respectively for the 10 and two-year papers.

“While this maintains the CBK’s signal to investors that it will not yield to investor pressure to accept expensive debt, the rates being accepted at each subsequent auction still signals the opposite,” said analysts at Sterling Capital.

The aggressive bidding has persisted despite the government’s signal of reduced net domestic borrowing in the current fiscal year.

Read: Jittery investors scramble for short-term Treasury securities

The target was cut to Sh316 billion from Sh586.5 billion, with the burden shifting to external lenders, but analysts expect that the market will continue to pressure the government on rates until external financing starts flowing into the country.

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