CBK’s rate cut lowers cost of Treasury bonds

The Treasury Building in Nairobi. The government said it will be aggressive on borrowing long-term. Photo/File
The Treasury Building in Nairobi. The government said it will be aggressive on borrowing long-term. Photo/File 

Investors will get another chance to buy a long-term Treasury bond after the Central Bank of Kenya (CBK) re-opened a Sh15 billion 20-year paper that was first issued in November.

The bond, which will be sold simultaneously with another five-year paper on Tuesday and Wednesday next week, is a reflection of the Treasury’s confidence in the stabilisation of its cost of borrowing, which had last year surged to a high of over 20 per cent for a two-year paper before falling to single-digits towards end of the year.

The five-year bond will offer investors an 11.855 per cent coupon rate while the 20-year will offer investors a 12 per cent rate. Interest returns on both bonds will be payable twice a year.

Bond traders and analysts said that last week’s lowering of the Central Bank Rate to 9.5 per cent from 11 per cent set in November 2012 has made it less costly for the government to issue long-term debt.

Prudent management of the public debt discourages borrowing long-term loans at high rates.

“The cut in the policy rate will lower the interest payments on debt, an important part of recurrent expenditure in the budget is debt repayments,” said Alex Muiruri, a fixed income dealer at African Alliance Investment Bank.

The government has said it will be aggressive on borrowing long-term in it its latest policy statement published last week.

“While we had achieved a ratio of 85:15 in favour of long-term bonds, the appetite for short-dated Treasury bills increased more recently due to rising inflationary expectations.

Going forward, the Government will gradually unwind short-term debt and replace this with the long-term ones in conformity with the policy target ratio of 75:25,” says the 2013 Budget Policy Paper.

Analysts said that there is also high liquidity in the market which will give the CBK flexibility to accept debt at lower rates than in the previous issue.

“CBK has made clear of its intentions to keep rates low and will not accept the aggressive bids, mainly to avoid sending counter-signals to the market.

"Besides liquidity is very high and given the limited investment options, investors might want to avoid being locked out,” said Faith Atiti, a research analyst at NIC Securities.

The last 20-year bond was sold at 13.54 per cent in November when the CBK accepted Sh3.17 billion out of Sh12.72 billion offered by investors.

Before November’s issue, the last 20-year bond was offered in June 2011 and was sold at 14.822 per cent. The latest bond offer from the CBK will also increase liquidity on the secondary market for such bonds.

Re-opening of the bond will increase the number of buyers, which makes secondary trading more liquid.

The government is feeling pressure on its finances as the Kenya Revenue Authority (KRA) has fallen short of its collection target as at the half-year mark.

Last year’s season of strikes saw the government bow to demands by doctors, teachers and lecturers to increase pay which added an unplanned Sh40 billion to the recurrent budget.

KRA has collected Sh380 billion in the first half of the financial year, less than half the Sh880 billion end-year target.