Kenya Secures KSh 60.6 Billion in Oversubscribed Bond Auction as IMF Negotiations Stall

Kenya commenced 2026 on a note of cautious optimism, successfully raising KSh 60.6 billion through its first bond auction of the year, even as the country continues to navigate prolonged negotiations with the International Monetary Fund that have left critical external financing commitments in limbo. The fully subscribed auction, conducted by the Central Bank of Kenya (CBK) as fiscal agent for the National Treasury, underscores both the resilience of Kenya’s domestic debt market and the government’s increasing reliance on local investors to bridge financing gaps created by the absence of multilateral support.

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Strong Investor Appetite for Long-Tenor Securities

The January 12, 2026 bond reopening attracted bids totaling KSh 71.5 billion against a target of KSh 60 billion, delivering a performance rate of 119.2% and signaling robust investor confidence in Kenya’s sovereign debt instruments. The CBK accepted KSh 60.58 billion from the total bids received, with the entire amount constituting net new borrowing as no redemptions were attached to the auction—a detail that carries significant implications for Kenya’s growing debt stock.

The auction involved the reopening of two existing fixed-rate bonds: the 20-year FXD1/2019/020 with 13.2 years remaining to maturity, and the 25-year FXD1/2022/025 with 21.8 years left. Investor demand was heavily concentrated at the long end of the yield curve, a pattern that has characterized recent Kenyan debt auctions as institutional investors seek to lock in attractive yields amid expectations of future interest rate cuts.

The 25-year bond proved particularly popular, attracting KSh 48.18 billion in bids and accounting for KSh 40.34 billion of the accepted amount. The instrument cleared at an average accepted yield of 13.7561%, offering investors a compelling return relative to its coupon rate of 14.1880%. The 20-year bond, meanwhile, drew KSh 23.36 billion in bids, with KSh 20.24 billion accepted at an average yield of 13.2623% against a coupon of 12.8730%.

According to market analysts, the strong performance of long-dated securities reflects a strategic shift among Kenya’s institutional investors, particularly pension funds and insurance companies, which are increasingly favoring bonds over equities and short-term instruments. Assets under management by collective investment schemes more than doubled to KSh 679.6 billion in September 2025 from KSh 316.4 billion a year earlier, according to data from the Capital Markets Authority, with government securities accounting for 45.6% of total assets.

Domestic Borrowing Shoulders the Fiscal Burden

The January auction represents the latest chapter in Kenya’s ongoing heavy reliance on domestic debt markets to finance government operations. The FY2025/26 borrowing plan targets KSh 901.0 billion in net financing, split between KSh 613.5 billion (68%) from domestic sources and KSh 287.4 billion (32%) from external borrowing. This composition reflects a deliberate strategy to deepen the domestic debt market while limiting exposure to external vulnerabilities such as exchange rate risks and conditionalities attached to multilateral lending.

From July through early December 2025, the Treasury offered KSh 380 billion in bond reopenings, attracted KSh 1.09 trillion in bids, and accepted KSh 585.2 billion. After accounting for KSh 119.8 billion in redemptions during this period, net domestic borrowing from bonds stood at KSh 465.4 billion by early December. The January auction adds further pressure relief on the government’s cash position at the start of the calendar year, though questions remain about the sustainability of this borrowing trajectory.

Kenya’s total public debt stood at KSh 11.8 trillion as of June 2025, equivalent to 67.8% of GDP. Of this amount, KSh 5 trillion comprises domestic debt while KSh 5.09 trillion accounts for external debt. Domestic debt largely consists of Treasury Bills and Treasury Bonds, whereas external debt is owed to multilateral, bilateral, and commercial creditors.

The government’s net domestic borrowing target of KSh 635.5 billion for FY2025/26 is a substantial figure, forming a critical part of the overall financing strategy for the KSh 4.24 trillion national budget. However, this heavy reliance on domestic borrowing carries risks, including potential crowding out of private sector credit and upward pressure on interest rates that could dampen economic growth.

The IMF Impasse and Its Ramifications

The successful bond auction occurs against a backdrop of protracted and increasingly uncertain negotiations between Kenya and the IMF. Kenya’s previous four-year, $3.6 billion IMF program expired in April 2025 without the country securing a final disbursement of approximately $850 million after struggling to meet key targets, including reducing its budget deficit and increasing tax revenue.

The government formally requested a new IMF-supported program, and preliminary discussions have been underway. However, progress has been slow. In December 2025, Kenya’s Cabinet Secretary for the National Treasury, John Mbadi, indicated that IMF officials were slated to visit Kenya in January 2026 to further discussions and conduct a debt sustainability analysis. Yet as of early January, no IMF disbursements have been received in the fiscal year to date.

Market analysts and rating agencies have warned that the absence of IMF support carries broader implications beyond the direct financing gap. S&P Global Ratings noted that since IMF funding often serves as a catalyst for other official and private flows, delays in securing a new program could impact Kenya’s ability to obtain other external financing, including approximately $800 million from the World Bank and $1.5 billion from the United Arab Emirates.

Independent analysts have suggested that a new IMF agreement is unlikely to be reached before the 2027 general elections, citing the need for comprehensive reforms and the Fund’s potential requirement that Kenya repay part of its existing debt before a substantive new financing program can be approved. The IMF has requested a governance diagnostic assessment, with the first draft expected to be provided to the government by year-end, and reform proposals contained therein are likely to feature prominently in any agreed program.

The delayed IMF engagement represents a significant policy challenge for the Kenyan government. Without the anchor of an IMF program, Kenya faces reduced access to concessional financing, higher borrowing costs in international markets, and diminished confidence among some foreign investors and development partners who view Fund support as a seal of approval for a country’s economic policies.

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Balancing Fiscal Consolidation with Political Realities

Kenya’s fiscal strategy for FY2025/26 reflects a delicate balancing act between achieving consolidation objectives and responding to domestic political pressures. The government aims to reduce the fiscal deficit from 5.7% of GDP in FY2024/25 to 4.8% of GDP in FY2025/26, with a medium-term target of bringing the debt-to-GDP ratio down from 63.0% in 2024 toward the target range of 55% ± 5% by 2028.

However, this fiscal consolidation effort has faced significant headwinds. In June 2024, widespread public protests led to the withdrawal of the Finance Bill that had proposed various revenue-raising measures. The protests, driven by governance concerns and perceptions of wasteful government spending, forced authorities to recalibrate their fiscal strategy and adopt a more cautious approach to tax increases.

The IMF’s insistence on further fiscal tightening—reportedly seeking a tightening of the primary balance of 1.1 percentage points of GDP between calendar years 2024 and 2026—sits uncomfortably alongside domestic political realities. As one economic think tank noted, the adopted Finance Act for 2025-26 anticipates a modest weakening of the primary balance instead, creating a policy disconnect between IMF expectations and government actions.

Interest payments are projected at KSh 1.1 trillion in FY2025/26, consuming over a quarter of government revenue and representing one of the largest single line items in the budget. This heavy debt service burden limits the government’s fiscal space for development spending and social programs, creating political tensions as citizens demand visible improvements in public services and infrastructure.

Institutional Investor Dynamics and Market Liquidity

The success of Kenya’s recent bond auctions, including the January reopening, owes much to structural changes in the country’s institutional investor landscape. Pension funds, which have a natural preference for long-term bonds that match their liability profiles, have seen an increase in annual collections, partly driven by higher mandatory contributions to the National Social Security Fund (NSSF).

Sterling Capital analysts noted in a fixed income report that “pension funds remain underweight on equities and have a bias for fixed income investment options like bonds and bank deposits that provide predictable cash flows.” The significant growth in assets under management for collective investment schemes over the past year has ensured high liquidity in the market, which in turn supports strong subscription rates in primary debt auctions.

The tax-exempt status of certain government securities, particularly infrastructure bonds, adds to their attractiveness for institutional investors. While the January auction involved conventional fixed-rate bonds subject to 10% withholding tax, the broader menu of government securities available to investors includes infrastructure bonds that offer tax-free returns, making them particularly appealing to pension funds and insurance companies seeking to maximize after-tax yields.

Market liquidity has also been supported by the Central Bank’s accommodative monetary policy stance. Following a series of repo rate cuts in response to declining inflation, yields on short-term Treasury bills have compressed, prompting investors to shift toward longer-duration bonds that offer higher returns. The Kenya 10-year government bond yield stood at 13.48% in July 2025, illustrating the more attractive returns available at the longer end of the market.

Regional Context and Comparative Perspective

Kenya’s heavy reliance on domestic borrowing reflects both the constraints it faces in accessing external finance and the relative depth of its domestic capital markets compared to regional peers. While many African countries struggle to develop robust local bond markets and must therefore rely more heavily on external borrowing, Kenya has cultivated a sophisticated domestic investor base capable of absorbing substantial government debt issuance.

The Central Bank of Kenya has invested in market infrastructure to support this development, including the introduction of the Dhow Central Securities Depository (DhowCSD) system, which went live in July 2023. This platform provides world-class registry, custodial, and settlement services for both primary and secondary market operations, enhancing the efficiency and transparency of Kenya’s government securities market.

However, Kenya’s domestic borrowing strategy also carries opportunity costs. High government borrowing can crowd out private sector access to credit, potentially constraining business investment and economic growth. Commercial banks, faced with the attractive risk-return profiles of government securities, may reduce lending to private businesses, particularly small and medium enterprises that are crucial drivers of employment and innovation.

Looking Ahead: Sustainability Questions

As Kenya navigates 2026, several critical questions loom over its fiscal and debt management strategy. Can the government sustain its current pace of domestic borrowing without triggering adverse consequences such as sharply higher interest rates or crowding out of private investment? Will negotiations with the IMF ultimately bear fruit, and if so, what conditions will be attached to any new program? How will the approach of the 2027 general elections affect fiscal discipline and reform implementation?

The January bond auction, while successful, represents a continuation of a pattern that may not be sustainable indefinitely. Kenya’s domestic debt market, though relatively deep by regional standards, has finite capacity to absorb government borrowing. Each successful auction adds to the stock of debt that must eventually be serviced and refinanced, and the interest burden of KSh 1.1 trillion projected for FY2025/26 already represents a significant constraint on fiscal flexibility.

Moreover, the structure of Kenya’s debt portfolio carries rollover risks. A substantial portion of domestic debt consists of Treasury bills with maturities of one year or less, requiring frequent refinancing and exposing the government to potential volatility in investor sentiment or market conditions. While the recent emphasis on longer-tenor bonds helps to mitigate this risk, the legacy stock of short-term debt remains a vulnerability.

Conclusion: Navigating Uncertainty

The successful KSh 60.6 billion bond auction that opened Kenya’s 2026 calendar demonstrates the continued confidence of domestic investors in government securities, even amid macroeconomic uncertainties and the ongoing absence of IMF support. This confidence reflects several factors: the relative stability of Kenya’s macroeconomic indicators, the attractive yields offered on government debt, the preference of institutional investors for fixed-income securities, and perhaps most fundamentally, the perception that Kenya’s government will honor its debt obligations.

Yet this market confidence should not obscure the underlying fiscal challenges that Kenya faces. The government’s heavy reliance on domestic borrowing is a symptom of constrained access to external finance, which in turn reflects unresolved policy tensions with multilateral partners and the legacy of missed fiscal targets. The IMF impasse, while frustrating for officials eager to close financing gaps, may also serve as a forcing mechanism for Kenya to develop more sustainable fiscal policies grounded in domestic revenue mobilization rather than continuous borrowing.

As the year progresses, Kenya’s ability to maintain market access on favorable terms while working toward fiscal sustainability will depend on several factors: the evolution of IMF negotiations, trends in domestic inflation and interest rates, investor confidence in the government’s economic management, and the political economy dynamics as the country moves closer to elections. The January bond auction provides a positive start, but the road ahead remains challenging and uncertain.

For domestic investors who participated in the auction, the bonds offer predictable returns backed by the full faith and credit of the Kenyan government. For policymakers, the successful auction provides temporary breathing room but underscores the urgent need for a more comprehensive strategy to address Kenya’s structural fiscal challenges. And for citizens watching from the sidelines, the growing debt burden raises fundamental questions about intergenerational equity and the sustainability of current fiscal trajectories. The answers to these questions will shape Kenya’s economic future for years to come.

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By: Montel Kamau

Serrari Financial Analyst

12th January, 2026