Capital Markets

Two-year bond returns as State faces high rates


The National Treasury building in Nairobi. FILE PHOTO | NMG

The Treasury has floated a two-year bond for the first time in two-and-a-half years as it looks to avoid long-term exposure to high-interest rates while also satisfying the need to fill the budget deficit for the fiscal year.

The two-year tenor is one of the shortest that the government can offer for a bond, and is normally deployed in times of high-interest rates. The shortest is a one-year paper, last issued in 2012.

In the August bond whose sale started on Monday, the Treasury is seeking a total of Sh40 billion from a dual-tranche comprising a new two-year paper and a reopened five-year one first sold last month.

The coupon rate for the two-year will be market determined while that of five years is at 16.84 percent.

The most recent two-year bond was floated in January 2021, paying a coupon of 9.48 percent. This month’s offering is, however, likely to see much higher rate demands, going by recent trends.

Bonds have seen their rates rise sharply in the last few months because of heightened demand for debt by the State, coupled with high inflation and a weaker shilling.

This has forced the Treasury and Central Bank of Kenya (CBK) to concentrate on issuing short-dated papers to avoid exposure to high rates, on the longer end of the yield curve, which would have long-term implications on the cost of servicing Kenya's domestic debt.

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