The Treasury has shied away from its policy of issuing long-dated bonds, seeking to avoid locking in higher debt service costs in a rising interest rate environment.
An analysis of the duration of bonds issued at primary auction in the first half of 2023 shows the papers had an average duration of 7.4 years in contrast with 12.9 years in the comparable period in 2022.
Between January and June this year, the CBK ran 13 auctions which included bond reopening and tap sales where the longest-tenured papers were the new 17-year infrastructure bond and the reopening of a 15-year paper.
In contrast, the Central Bank of Kenya (CBK) had issued longer-dated papers in the opening half of 2022 including the reopening of a 2021-issued 25-year paper and two infrastructure bonds with tenures of 19 and 18 years respectively.
The switch to shorter-dated bonds has coincided with the agitation by investors for higher risk-adjusted returns on the securities, factoring in increased inflation, and increased domestic financing by the exchequer.
According to analysts, the Treasury has been forced to pick a lesser evil between obliging to the demand for shorter-dated bond issues and issuing longer-dated bonds at a premium even as its domestic debt management policy remains anchored in issuing long-dated instruments.
“The government might want to reduce the refinancing risks by increasing the time to maturity but have been forced to meet the market halfway by issuing bonds with shorter tenures,” IC Asset Managers Economist Churchill Ogutu observed.
The switch is expected to bring down the average time to maturity for the government’s domestic debt portfolio.
Data from the 2023 Medium Term Debt Management Strategy by the Treasury shows the average time to maturity for the domestic debt portfolio rose from 6.3 years in December 2020 to 7.8 years at the end of last year.
“There was an improvement in the average time to maturity for domestic debt to 7.8 years, indicating issuance of longer-dated instruments in line with the 2021 strategy,” the Treasury noted.
In the run-up to the end of the 2022/23 fiscal cycle, the exchequer was forced to rely on tap sales of a new three-year bond to meet its domestic borrowing target with the multiple issues at primary auction mirroring the pressure.
As of December 2022, refinancing risk indicators improved as the stock of Treasury bills decreased.
Despite increased preferences for shorter-dated papers, especially Treasury bills, the government’s share of domestic debt held in Treasury bills has dropped to 12.99 percent as of June 30 from 14.54 percent at the same time last year.
The share of Treasury bonds as a percentage of government domestic debt has meanwhile grown to 84.85 percent from 83.2 percent a year prior.
The Treasury has been cutting its exposure to T-bills in recent years after the maturity profile of domestic debt fell to 4.1 years in June 2018.
A shorter-term profile implies the government would face notable refinancing pressures that are characterised by large volumes of debt falling due in short intervals.
