CBK Launches KSh 50Bn Tap Sale After Rejecting KSh 228Bn on Reopened Tax-Free IFBs

The Central Bank of Kenya (CBK) has announced a KSh 50 billion tap sale of two infrastructure bonds after last week’s record oversubscription showed strong investor appetite for tax-free government securities. The sale, running from August 19 to August 21, 2025, will reopen the fifteen-year IFB1/2018/015 and nineteen-year IFB1/2022/019, which had attracted bids worth KSh 323.4 billion against an initial KSh 90 billion offer.

CBK only accepted KSh 95 billion, highlighting the scale of unmet demand. This represents a remarkable 359% oversubscription rate, demonstrating unprecedented investor enthusiasm for long-dated, tax-free government securities in Kenya’s domestic debt market.

The tap sale will be allotted on a first-come, first-served basis, with settlement set for August 25, 2025. Pricing is based on the weighted average accepted yields from the August 18 auction, adjusted for accrued interest, ensuring investors secure the same tax-free benefits as the initial issues.

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Bond Details and Investor Attractions

Infrastructure Bond Specifications:

David Luusa, Director of Financial Markets at CBK, said the tap sale will be conducted on a first-come, first-served basis, with bids priced at the average rate of accepted bids from the August auction, adjusted for accrued interest. “The tap sale offers investors an opportunity to participate in the same bonds at prevailing market rates,” he said.

Understanding the Unprecedented Demand

The record performance rate of 359% in last week’s sale reflected unprecedented demand for long-dated, tax-free bonds. Deep-pocketed investors offered the government a record Sh323.4 billion in the August infrastructure bond (IFB) sale as they scrambled to lock in its attractive tax-free return amid the Central Bank of Kenya’s (CBK) aggressive push to lower interest rates.

Analysts link the rush to several key factors:

Tax-Exempt Status Advantage

Infrastructure bonds are used by the government for specified infrastructure projects. These bonds typically see a lot of market interest because returns are tax exempt. The August 2025 sale carried coupons of 12.5 percent and 12.96 percent, which are equivalent to 13.89 percent and 14.4 percent on equivalent ordinary bonds that attract a tax of 10 percent on interest.

Monetary Policy Environment

The Central Bank of Kenya (CBK) has lowered its base lending rate by 25 basis points to 9.5 percent, citing stable inflation, a recovering economy, and growth in private sector lending. The apex bank has slashed rates by a cumulative 325 basis points since August 2024, when the CBR stood at 13 percent.

This accommodative monetary policy stance has prompted investors to seek higher-yielding, longer-duration securities. Even after the pullback, a ~9% risk-free return in early 2025 is still compelling. Longer T-Bonds frequently offer double-digit coupon rates.

Market Liquidity and Investment Environment

The huge offers also reflected a highly liquid market, resulting from slow growth in lending by banks and elevated cash holdings by individuals and companies as they wait for the economy to improve before making new investments.

Non-competitive bids alone amounted to over KSh 64 billion, underlining the broad-based interest. This demonstrates significant retail investor participation alongside institutional interest.

Strategic Implications for Government Financing

By moving quickly with an infrastructure bond tap sale, CBK is capitalizing on this momentum to raise additional funds while maintaining market confidence. The issuance also strengthens the government’s infrastructure financing strategy without increasing tax burdens on investors.

The amount raised nearly matched Sh94.6 billion in redemptions falling due on the same date, demonstrating effective debt management timing. This strategic approach helps the government meet its financing needs while managing refinancing risks.

The infrastructure bonds are specifically earmarked for development projects, providing transparency in fund utilization that often enhances investor confidence. Net proceeds of KSh 94.64 billion will finance infrastructure projects in transport, energy, and water.

Kenya’s Domestic Debt Market Context

As of January 2024, Kenya’s domestic debt was KES 5.89 trillion, of which 85% are Treasury Bonds (KES 4.88 trillion) and about 15% Treasury Bills (KES 844.8 billion). This skew toward bonds reflects heavy government reliance on long-term borrowing and provides a larger, more liquid secondary market for investors.

The bonds increase domestic debt stock, which currently stands at KSh 6.3 trillion in July 2025. The Central Bank of Kenya reported that domestic borrowing increased in the past 12 months from KSh 5.4 trillion reported in June 2024.

The recent Debt Sustainability Analysis (DSA) indicates that Kenya’s public debt is sustainable but with a high risk of debt distress. The present value (PV) of public debt was 63.0 percent of GDP against the benchmark debt threshold of 55 percent. The National Treasury has until November 1, 2029, to bring the PV of public debt within the threshold to comply with the law.

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Secondary Market Impact and Trading Dynamics

The outcome of this tap sale will be closely watched to gauge whether demand sustains at the same intensity, especially given the first-come, first-served allotment structure. With KSh 228.4 billion in bids rejected, unmet demand is expected to spill into the secondary market.

The Nairobi Securities Exchange bond market has already traded a record KSh 1.55 trillion in the first seven months of 2025, surpassing the 2024 full-year record of KSh 1.54 trillion and on track to break the KSh 2.5 trillion mark. Demand for the reopened IFB papers, along with possible spillover into other bonds, could further lift secondary market activity.

Tax-free infrastructure bonds dominate NSE trading, with recent data showing these securities consistently outpacing other treasuries in secondary market transactions. The value of infrastructure bonds traded in four weeks of December 2022 was Sh26.42 billion, outpacing the Sh14.81 billion seen in transactions of other bonds.

Historical Context of Tap Sales

In August 2024, a tap sale two weeks after a heavily oversubscribed IFB raised an additional KSh 38 billion. Tap sales offer rejected bidders allocations at auction-level yields instead of paying a premium in the secondary market, providing an efficient mechanism for managing excess demand.

Similar oversubscriptions in February 2024 and February 2025 drove post-auction price gains and yield compression as investors competed for limited supply. This pattern demonstrates the consistent attractiveness of Kenya’s infrastructure bonds among domestic and international investors.

Investment Process and Accessibility

Investors interested in the tap sale must submit their bids by August 21, 2025, or until the Sh50 billion target is fully subscribed. Successful bidders will be notified through the DhowCSD Investor Portal, with payment due by 2 p.m. on Monday, August 25, 2025.

Through the Dhow CSD portal and mobile application, Individuals and Corporate bodies can invest in Treasury bills without going through an intermediary by accessing https://dhowcsd.centralbank.go.ke/ and registering for CSD accounts. Investors can equally invest via their respective Kenyan commercial banks and investment banks as custodials.

The minimum investment threshold and accessible digital platforms have democratized access to government securities, contributing to the broad-based participation observed in recent auctions.

Macroeconomic Environment Supporting Demand

Several macroeconomic factors have created a favorable environment for government securities demand:

Exchange Rate Stability

The local currency has depreciated by just 0.2 basis points against the US dollar since June 10, remaining around Ksh129.2, a level seen as stable given current conditions. This stability reduces currency risk for domestic investors and supports foreign participation.

Adequate Foreign Reserves

Kenya’s foreign exchange reserves, currently at 4.7 months of import cover, provide an additional buffer. This is well above the statutory requirement of four months, affording the CBK flexibility in monetary policy implementation.

Inflation Stability

Kenya’s overall inflation stood at 3.80% in June 2025, well within the CBK’s target range of 5±2.5%, supporting the central bank’s accommodative monetary policy stance and making fixed-income securities more attractive.

Looking Ahead: Market Implications

Analysts note that the decision to reopen the bonds through a tap sale reflects the government’s effort to balance its financing needs while managing borrowing costs. The oversubscription and subsequent rejection of a large portion of bids in the earlier auction point to strong investor confidence despite relatively high yields.

For the government, the record oversubscription reflects robust domestic liquidity and strong investor confidence in long-term paper. This reduces reliance on more expensive external financing and supports the government’s debt management strategy.

The success of this tap sale could set precedents for future debt management strategies, particularly in addressing excess demand situations. The CBK is set to release the September bond issuance calendar in the coming weeks. Market focus will be on whether additional tap sales will be added, potentially absorbing part of the record-breaking excess demand.

Broader Investment Landscape Context

These rates are also high enough to compete favourably against other asset classes, in a market where awareness of financial investment products has gone up significantly in recent years due to increased consumer education and growth in fund managers who offer professional investment services.

The only assets beating bonds in effective returns are equities, which presently lead the market in 2025 with a year-to-date gain of 32.4 percent or Sh627.7 billion to Sh2.57 trillion in investor wealth at the Nairobi Securities Exchange.

However, the guaranteed nature of government bond returns, combined with tax-free status for infrastructure bonds, provides compelling risk-adjusted returns that appeal to conservative investors and institutions with steady income requirements.

The successful execution of this tap sale will demonstrate Kenya’s sophisticated debt market infrastructure and the CBK’s ability to respond dynamically to market conditions, potentially enhancing the country’s reputation among regional and international investors seeking exposure to East African markets.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

20th August, 2025