The Treasury has once again leaned on short-term bonds in its quest to raise Sh35 billion from the domestic credit market this month.
This is after the Central Bank of Kenya (CBK) on Wednesday re-opened two- and five-year fixed coupon bonds whose tenors sit at 1.8 and 4.8 years respectively and which remain on offer until next Wednesday.
The two papers have coupon rates of 16.9723 and 16.844 percent respectively.
The increased reliance on short-term bonds by the exchequer seeks to match issuances of government securities to investor interests which have been stuck on short-dated issues in the wake of duration risks posed by rising interest rates.
With interest rates tipped to rise further in the short run, investors have preferred buying into government paper with lower tenures in a bid to avoid locking in returns that could be progressively thinner as yields on future bond issuances soar.
Last week, for instance, investors snubbed a tap sale on the two papers in anticipation of fresh and greater yielding issues with the exchequer subsequently raising Sh3.45 billion from the Sh15 billion on offer.
“Investors largely kept off last week’s auction as they awaited fresh issues this October,” analysts at Genghis Capital noted.
The Treasury has almost exclusively relied on four short-term bonds to meet its domestic borrowing targets, raising in excess of Sh222 billion since May.
While seeking to align with investors' quest for shorter-dated securities, the strategy has equally paid off in the exchequer’s avoidance of committing to high-interest rates over the medium to long term.
But despite the CBK’s signalling that it would not accept investor pressure for higher interest rates, the apex bank’s acceptance of higher rates in subsequent auctions has defied the hard-ball stance.
To try to quell the interest rate pressure, the Treasury has proposed to trim the net domestic borrowing target to Sh415.3 billion from Sh587.4 billion as illustrated in the draft 2023 budget review and outlook paper.
The lower local borrowing threshold has been anchored in the anticipation of improved inflows in external resources, specifically from multilateral lenders such as the World Bank, the IMF and the African Development Bank.
Investors are nevertheless yet to take the bait as they hold out to see whether the exchequer will abide by the revised targets amid pressure on reaching tax targets and the prevalence of external shocks that could see the country miss out on opportunities to access the international capital markets.
Through the first two months of the current 2023/24 fiscal year, actual receipts from domestic borrowing stood at Sh125.7 billion, inclusive of rollovers to represent 18.2 percent of the full-year gross domestic borrowing target of Sh688.2 billion.
The government has signalled it could require less in borrowed resources by sanctioning the reduction of the recurrent budget of ministries and departments by 10 percent.
