CBK’s Long Game: Dual-Tranche Bond Sale Pushes for Durable Funding and Fiscal De-risking

The Central Bank of Kenya (CBK), acting as the fiscal agent for the National Treasury, has initiated its ninth domestic bond reopening of the Fiscal Year (FY) 2025/26, signaling an intensified commitment to securing durable, long-term funding. The auction seeks to raise KSh 40 billion through a dual-tranche sale featuring two ultra-long-duration instruments: the 30-year SDB1/2011/030 and the 25-year FXD1/2021/025. This aggressive tilt towards the long end of the yield curve is the Treasury’s calculated response to the persistent need to lock in predictable funding and proactively reduce the rollover risk associated with shorter-tenor securities, particularly as the government prepares for significant debt maturities later in the fiscal year.

The offer, which opened this week and is set to close on December 3, with settlement scheduled for December 8, is highly anticipated by market participants. It underscores a strategic pattern established since July, where the government has embraced a front-loaded borrowing approach. By aggressively tackling its domestic financing needs early in the budget cycle, the Treasury aims to minimize market uncertainty and ensure liquidity for government operations, aligning with broader fiscal consolidation targets aimed at narrowing the current budget deficit for FY25/26.

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The Macroeconomic Imperative for Long-Duration Debt

Kenya’s decision to prioritize ultra-long bonds is driven by a complex set of domestic and external financial realities. On the global front, although international interest rate hikes have moderated, the lingering effects continue to influence the cost of external commercial borrowing, making the domestic market a more stable and cost-effective source of financing. Domestically, the government faces substantial redemption pressures in the medium term, including both the amortization of domestic bonds and the repayment of high-profile external obligations, such most famously the maturing Eurobond issues.

By targeting bonds with maturities extending beyond fifteen years—specifically the 15.2 years remaining on the SDB and 20.4 years on the FXD—the Treasury is successfully smoothing its debt repayment profile. This mechanism is vital for maintaining debt sustainability as it pushes the repayment burden far into the future, offering the government crucial breathing room for economic growth and revenue generation.

Furthermore, this issuance strategy provides essential relief to the foreign exchange market. Heavy reliance on short-term domestic borrowing can lead to volatile money market conditions, but securing long-term funding domestically reduces the immediate need to issue or refinance foreign currency debt, which can put downward pressure on the Kenyan Shilling against the US Dollar.

Investor Appetite and Market Dynamics

The Treasury’s confidence in launching such a significant long-end offer is bolstered by the robust demand witnessed in recent auctions. The November 24 auction, for instance, saw bids soar to an impressive KSh 115.86 billion against an offered amount of KSh 40 billion. Although the government maintained discipline and accepted KSh 54.76 billion, this level of oversubscription confirms strong investor appetite for government debt. This performance lifted the cumulative FY25/26 bond proceeds to approximately KSh 598 billion before the December sale, placing issuance significantly ahead of typical mid-year levels.

Investor positioning in the Kenyan debt market currently favors duration, primarily driven by institutional investors. Pension funds and insurance companies are the dominant buyers in the ultra-long sector. Their investment mandates, dictated by Asset Liability Management (ALM) principles, require them to match their long-term liabilities (future pension and insurance payouts) with long-duration, fixed-income assets. The fixed coupon rates of 12.000% on the SDB1/2011/030 and 13.924% on the FXD1/2021/025 offer these funds predictable, high-yield cash flows over two decades, making these instruments particularly attractive for their liability matching strategies.

However, the question of whether the long-end premium will hold remains a key watchpoint for the December auction. While recent auctions have cleared slightly below market-weighted yields, indicating downward pressure on rates, the sheer volume of the KSh 40 billion offer will test market liquidity. Investors will be keenly assessing whether the current yields adequately compensate for the inflationary risks and potential currency volatility over such extended tenors. The Monetary Policy Committee (MPC) of the CBK has consistently signaled its commitment to price stability, but persistent underlying inflation, driven by factors like high food and fuel prices, introduces caution into long-term pricing decisions.

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Deep Dive into the Dual Tranches

The choice of reopening two distinct ultra-long bonds—one with a remaining tenure of 15.2 years and another at 20.4 years—allows the CBK to manage its liquidity preference and tap into slightly different investor pools.

SDB1/2011/030: The 30-Year Benchmark

• Coupon: 12.000%
• Remaining Tenure: 15.2 years
  The 30-year bond, originally issued in 2011, acts as a historical benchmark. While its 12.000% coupon is lower than the 25-year bond, its existing presence in the market provides a known quantity for investors, offering a crucial data point for long-term rate expectations. The remaining 15.2 years align perfectly with the need for mid-range long-term liability coverage for many pension schemes, making it a reliable staple in the long-end portfolio.

FXD1/2021/025: The 25-Year Duration Play

• Coupon: 13.924%
• Remaining Tenure: 20.4 years
  The FXD1/2021/025 is the more aggressive duration play. Its higher coupon of 13.924% reflects the market conditions prevalent around its initial issue date and offers a more attractive nominal return to investors who are willing to take on an additional five years of tenure risk compared to the 30-year bond. For institutional investors managing extreme long-term liabilities, this bond is essential, providing the highest duration available in the current reopening, crucial for minimizing interest rate risk exposure over an extended time horizon.

The successful placement of both tranches will not only raise the KSh 40 billion but will also provide the CBK with invaluable data on the shape of the Kenyan Treasury Bond Yield Curve. The price difference between the two instruments will accurately reflect the market’s current premium for duration, which is a key indicator of long-term economic confidence and interest rate expectations.

Contingency and The Road Ahead

The government’s issuance path for the remainder of FY25/26 is intricately linked to two primary factors: revenue performance and the redemption calendar. Robust tax collection by the Kenya Revenue Authority (KRA) can reduce the pressure on domestic borrowing targets, potentially leading to smaller future auctions or a greater ability to manage the clearing yields downwards. Conversely, any significant shortfall in tax revenue will necessitate further aggressive borrowing, potentially driving up market rates.

The table below summarizes the substantial cumulative borrowing achieved so far:

The cumulative net borrowing of approximately KSh 598 billion is a testament to the success of the front-loaded strategy. However, the true test of fiscal resilience remains ahead, specifically the handling of the looming external debt service burden.

In conclusion, the December bond reopening is not merely a routine fundraising exercise; it is a critical component of Kenya’s macro-fiscal strategy. By focusing intensely on the ultra-long end of the market, the CBK is successfully converting robust domestic institutional liquidity into durable public finance, significantly de-risking the future debt profile. The market’s response to the KSh 40 billion offer will provide the clearest signal yet of long-term confidence in the government’s fiscal trajectory and its commitment to interest rate stability moving into the crucial second half of the fiscal year.

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By: Montel Kamau

Serrari Financial Analyst

4th December, 2025