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Treasury leans on reopened bonds to tame cost of debt
In the current fiscal year, the Treasury has a net deficit of Sh901 billion, to be financed through domestic borrowing of Sh652.8 billion and external loans of Sh248.2 billion.
The Central Bank of Kenya (CBK) and the National Treasury are set to continue with their recent trend of reopening older bonds when raising fresh domestic debt, giving them control of the interest rates on the bonds amid elevated borrowing needs.
Reopened bonds pay investors a predetermined fixed interest rate (coupon) that was arrived at when the paper was initially floated in the market, unlike new bonds whose coupons are determined by investors’ bids.
The bond issuance calendar published in the Treasury’s 2025 annual borrowing plan shows that the government intends to reopen at least 36 individual bonds in the 12 months to June 2026, while issuing only one new paper —a 25-year bond in May 2026.
The reopened bonds will mainly be sold in pairs, targeting between Sh40 billion and Sh60 billion every month for the exchequer, although some months with a majority carrying periods to maturity of between five and 20 years each.
“Under the benchmark bond programme, fixed-rate bonds with maturities of two, five, 10, 15, 20, and 25 years will be issued, complemented by infrastructure bonds to strengthen domestic financing. The other strategy will be employing tap sales of recently issued instruments to enhance market liquidity and investor participation,” said the Treasury in the borrowing plan.
In the previous fiscal year, the CBK also leaned on reopened bonds for the government’s domestic borrowing, which stood at a net of Sh853.4 billion, which surpassed a revised target of Sh825.8 billion.
The 2024/2025 fiscal year was characterised by volatility in interest rates, with bond yields going as high as 18.27 percent for a 20-year paper that was reopened in July 2024, before falling to a range of 13 percent to 14.2 percent for bonds sold in May and June 2025.
Issuing a new bond at the prevailing yields in July 2024 would therefore have seen the government end up paying up to 18 percent in biannual interest to investors, with the reopened 20-year bond’s coupon of 13.75 percent offering a much cheaper alternative.
In a reopened bond auction, the CBK offers a one-time price discount to investors in such cases where the coupon is lower than the yield or rate at which they are willing to lend to the government.
This arrangement compensates the investors for lending at a lower rate than they demanded, while shielding the government from longer term exposure to higher interest rates on its bonds. The Treasury’s sensitivity to higher rates has been amplified by the higher borrowing needs on account of a wide budget deficit.
In the current fiscal year, the Treasury has a net deficit of Sh901 billion, to be financed through domestic borrowing of Sh652.8 billion and external loans of Sh248.2 billion.
The government has however fallen into a cycle of revisions of its borrowing targets through supplementary budgets in recent years due to revenue collection underperformance and increases in expenditure.
In the 2024/2025 fiscal year, the budget statement of June 2024 had set the deficit at Sh597 billion, which was to be financed through domestic borrowing of Sh263.2 billion, and external funding worth Sh333.8 billion.
Following three supplementary budget revisions, the deficit ballooned to Sh1.01 trillion, which combined with difficulties in raising external funding forced the Treasury to increase its domestic borrowing to Sh853.4 billion —three times the original projection.
