Central Bank Returns to Bond Market with KSh 50 Billion Fundraising Target Through Long-Term Treasury Securities

The Central Bank of Kenya (CBK), serving as the government’s fiscal agent, has returned to the primary bond market in October 2025 with an ambitious fundraising target of KSh 50 billion through the sale of two long-term reopened Treasury Bonds. This issuance represents the first bond auction of the month and forms part of the government’s ongoing strategy to secure domestic financing for budgetary requirements while managing its overall debt portfolio composition.

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Details of the October Bond Offering

According to the official CBK prospectus released to market participants, the auction features two reopened Treasury Bonds with different maturity profiles and coupon rates designed to appeal to diverse investor preferences across the institutional and retail spectrum. The bonds being offered are a 15-year Treasury Bond carrying a coupon rate of 12.65% per annum and a 20-year Treasury Bond offering a higher coupon rate of 13.44% per annum.

The reopening of existing bond issues rather than creating entirely new securities provides several advantages for both the government and investors. For the National Treasury, reopening bonds adds to the outstanding volume of specific issues, improving their liquidity in secondary markets and potentially reducing borrowing costs compared to establishing new benchmark issues. For investors, purchasing reopened bonds means acquiring securities with established trading histories and market prices, reducing uncertainty about valuation and liquidity.

The 15-Year Treasury Bond

The 15-year Treasury Bond being reopened in this auction was originally issued in 2018 and is scheduled to mature on May 9, 2033. With approximately eight years remaining until redemption, this medium-to-long-term security appeals to institutional investors such as pension funds and insurance companies that require longer-duration assets to match their liability profiles.

The 12.65% coupon rate represents semi-annual interest payments that provide bondholders with predictable income streams throughout the bond’s remaining life. At current market conditions, this yield offers attractive real returns above inflation, which the Central Bank projects to remain at approximately 5.25% through 2026, as detailed in recent Monetary Policy Committee statements.

For investors, the approximately eight-year remaining maturity provides a balance between yield and duration risk. Shorter maturities carry less interest rate risk but typically offer lower yields, while extremely long maturities offer higher yields but expose investors to greater uncertainty about future interest rate movements and inflation.

The 20-Year Treasury Bond

The 20-year Treasury Bond included in the October auction was first issued significantly earlier, in 2012, and carries a maturity date of July 22, 2041. With approximately sixteen years remaining until redemption, this bond represents a genuinely long-term investment suitable for institutional investors with extended investment horizons and limited need for near-term liquidity.

The 13.44% coupon rate reflects the longer duration and provides compensation for the additional risks associated with such an extended maturity period. Over sixteen years, numerous economic, political, and market developments can affect bond values, requiring investors to carefully consider their capacity to hold securities to maturity versus potential needs to sell in secondary markets.

Pension funds, which manage retirement savings with liability profiles extending decades into the future, represent natural buyers for such long-duration government securities. The predictable cash flows from semi-annual coupon payments align well with pension funds’ needs to meet periodic benefit payments to retirees while maintaining a balanced portfolio of assets and liabilities.

Auction Timeline and Payment Procedures

The sale period for both Treasury Bonds runs until Wednesday, October 15, 2025, providing investors with a limited window to submit their bids through authorized dealers or directly via the CBK’s electronic trading platform. The compressed auction timeline reflects the CBK’s confidence in robust investor demand based on recent oversubscriptions and the attractive yields being offered relative to inflation and alternative investment options.

Following the auction close, the CBK will conduct its evaluation of submitted bids, applying its acceptance criteria to determine which offers to approve and at what prices. All successful bidders are instructed to obtain their payment keys and exact amounts payable from the CBK DhowCSD Investor Portal or mobile application under the transactions tab on Friday, October 17, 2025.

This two-day settlement period between auction close and payment provides successful bidders time to arrange funding and complete the transaction procedures. The DhowCSD platform, which serves as Kenya’s Central Securities Depository system, has modernized the government securities market by enabling electronic bidding, settlement, and custody, significantly reducing operational risks and processing times compared to previous paper-based systems.

Secondary market trading in both bonds, conducted in minimum multiples of KSh 50,000, will commence on Tuesday, October 21, 2025. This standardized minimum trading unit reflects a balance between accessibility for smaller institutional investors and the operational efficiencies that larger lot sizes provide for market makers and the settlement system.

Liquidity Support: The Rediscount Facility

Recognizing that investors may occasionally face unexpected liquidity needs that require selling bonds before maturity, the CBK has established a rediscount facility serving as a lender of last resort for government securities holders. Under this arrangement, the Central Bank will repurchase bonds from investors at a penalty rate of 3% above either the prevailing market yield or the bond’s coupon rate, whichever is higher.

Investors seeking to utilize this facility must submit written instructions to the CBK via email at rediscounts@centralbank.go.ke, documenting their request and the specific securities they wish to rediscount. The penalty pricing structure serves multiple purposes: it provides genuine liquidity support when secondary market trading is insufficient, while simultaneously discouraging routine use of the facility for securities that could be sold in normal markets.

The existence of this backstop facility enhances the attractiveness of government bonds, particularly for smaller institutional investors or individuals who might otherwise hesitate to commit funds to less liquid securities. However, the penalty rate ensures that investors bear meaningful costs for early exit, encouraging them to maintain positions or seek buyers in secondary markets rather than routinely accessing central bank liquidity.

Recent Secondary Market Performance

Market data from the CBK reveals significant volatility in secondary market activity for Treasury Bonds in recent weeks. In the week ending October 9, 2025, total turnover in the secondary bond market declined sharply by 27.4% to KSh 30.6 billion, down from KSh 42.3 billion recorded in the previous week.

This substantial decline in trading volumes could reflect multiple factors affecting market participant behavior. Investors may be holding positions in anticipation of the new primary auction, preferring to assess the results and implied yield levels before making secondary market transactions. Alternatively, the decline might indicate reduced liquidity in the banking system, limiting institutional investors’ capacity to actively trade securities.

Secondary market liquidity remains crucial for the overall health and efficiency of the government securities market. Active trading enables price discovery, allows investors to adjust portfolio positions in response to changing circumstances, and supports the primary market by ensuring that investors can exit positions if needed. Periods of reduced secondary market activity can make investors more cautious about participating in primary auctions, potentially requiring higher yields to compensate for reduced liquidity.

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Government’s Debt Maturity Profile and Refinancing Requirements

Understanding the context for the October bond auction requires examining the government’s overall debt maturity profile and refinancing requirements. According to CBK data, the government faces substantial near-term maturities requiring either repayment or refinancing through new issuances.

As of mid-October 2025, outstanding government securities maturing within the next 12 months total KSh 989.66 billion in Treasury Bills and KSh 232.0 billion in Treasury Bonds. When future coupon interest payments are included in the calculation, the total maturity profile escalates to approximately KSh 1.9 trillion, representing a significant refinancing challenge that will require sustained market access throughout the coming year.

Treasury Bills, with their shorter maturities of 91, 182, and 364 days, create a continuous rollover requirement that demands weekly auctions to refinance maturing issues. The CBK conducts regular Treasury Bill auctions, typically seeking between KSh 20-30 billion per week to meet refinancing needs and provide incremental financing for budget deficits.

The concentration of maturities creates both challenges and opportunities for debt management. On one hand, large refinancing requirements expose the government to rollover risk—the possibility that market conditions deteriorate or investor demand weakens at precisely the moment when substantial amounts must be refinanced. On the other hand, the regular need to access markets maintains the government’s presence and relationships with investors while providing flexibility to adjust debt composition based on market conditions.

Significantly, the CBK’s maturity schedule indicates that the next major Treasury Bond redemption does not occur until December 2025, providing the National Treasury with considerable breathing room on its repayment timetable. This temporal gap reduces immediate refinancing pressure and allows the government to be more selective about when and at what rates it issues longer-term debt.

September Auction Success: A Positive Precedent

The context for the October bond offering is significantly influenced by the outstanding success of the previous auction conducted in September 2025. At that sale, where the CBK sought KSh 40 billion, investor demand proved overwhelming, with total bids reaching KSh 97.3 billion—an impressive oversubscription rate of 243%.

The fiscal agent ultimately accepted bids worth KSh 61.4 billion, exceeding the original target by more than 50%. This demonstrates the CBK’s opportunistic approach to debt issuance: when investor demand exceeds expectations and yields are favorable, the fiscal agent accepts additional bids beyond the announced target to take advantage of strong market conditions.

The September auction featured two ultra-long-dated bonds: a 20-year Treasury Bond offering a 13.2% coupon rate and a 25-year Treasury Bond with an even more attractive 14.2% coupon rate. These elevated yields reflected the extended duration and compensation for inflation risk over such lengthy time horizons, but evidently resonated strongly with institutional investors seeking high-yielding, long-duration assets.

The 25-year paper proved particularly popular, attracting KSh 69.3 billion in bids despite being the longest-dated security offered. The fiscal agent accepted KSh 37.9 billion for this tenor while rejecting other bids that presumably carried yields deemed too high relative to the government’s borrowing cost targets.

This strong auction performance demonstrates several important dynamics in Kenya’s government securities market. First, substantial domestic savings exist seeking investment opportunities, particularly among institutional investors like pension funds and insurance companies that are required by regulation to maintain significant allocations to government securities.

Second, the elevated coupon rates on offer provide attractive real returns compared to inflation expectations and alternative domestic investments. With inflation projected at 5.25% and bond yields ranging from 12.65% to over 14%, real returns of 7-9% annually represent compelling opportunities for risk-averse institutional investors.

Third, the oversubscription indicates that investor confidence in Kenya’s creditworthiness and debt sustainability remains robust despite the elevated debt levels. Investors appear willing to extend long-term financing to the government at yields they consider appropriate for the risks involved.

Composition of Kenya’s Government Debt Portfolio

Understanding the structure and composition of Kenya’s government debt provides essential context for evaluating individual auctions and overall fiscal sustainability. According to CBK data as of October 3, 2025, Treasury Bonds comprise the largest component of the government’s domestic debt stock, accounting for 81.31% of all domestically-held government securities.

This heavy reliance on bonds rather than shorter-term Treasury Bills reflects a deliberate debt management strategy aimed at reducing rollover risk and extending the average maturity of outstanding debt. Longer maturities provide greater certainty about financing costs and reduce the frequency with which the government must return to markets to refinance maturing obligations.

Treasury Bills, excluding repurchase agreements (REPOs), represent 16.24% of the domestic debt stock, while International Monetary Fund (IMF) loan obligations account for just 1.19%. The relatively small proportion of Treasury Bills indicates that the government has successfully shifted its borrowing profile toward longer-term instruments, though the weekly rollover of maturing bills still requires consistent market access.

Investor Base for Government Securities

The distribution of government securities ownership across different investor categories reveals important information about market structure and stability. According to CBK data, commercial banks dominate the government debt market, holding 35.3% of all outstanding Treasury Bills and Bonds. This concentration reflects banks’ substantial deposit bases, regulatory requirements to hold liquid securities, and their role as primary dealers in government securities auctions.

Pension funds represent the second-largest investor category at 14.4% of outstanding securities. These long-term institutional investors provide stable demand for government bonds, particularly longer-dated issues that match their liability profiles. Regulatory requirements mandate that pension funds maintain significant allocations to government securities, ensuring consistent auction participation.

Insurance companies hold 13% of government securities, reflecting similar regulatory requirements and investment preferences for fixed-income securities that generate predictable returns to match insurance policy obligations. Like pension funds, insurance firms typically favor longer-dated bonds that align with the extended time horizons of their liabilities.

Individual households hold 6.6% of all Treasury Bills and Bonds, representing retail investor participation in government securities markets. While smaller in aggregate than institutional holdings, retail investment has grown significantly with the introduction of mobile-based platforms that enable smaller denominations and easier access to these securities.

The diversified investor base provides important stability to the government securities market, as different investor categories have varying investment horizons, liquidity needs, and return requirements. This diversity reduces vulnerability to shifts in any single investor segment’s demand.

Overall Public Debt Position

As of the end of the most recent fiscal year, Kenya’s total public debt stood at KSh 11.8 trillion, comprising KSh 6.3 trillion in domestic debt and KSh 5.4 trillion in external debt. This substantial debt burden, equivalent to approximately 70% of GDP, has become a source of significant policy debate and concern among economists, civil society organizations, and international financial institutions.

The composition split between domestic and foreign debt reflects deliberate choices about currency risk, interest rate costs, and market capacity. Domestic borrowing, while potentially more expensive in nominal interest terms, avoids foreign exchange risk and supports development of local financial markets. External borrowing often carries lower nominal interest rates and longer maturities but exposes the government to currency depreciation risks and can create balance of payments pressures when debt service comes due.

The government has articulated a debt management strategy aimed at gradually reducing the debt-to-GDP ratio through a combination of fiscal consolidation, economic growth, and careful debt issuance management. However, achieving these objectives requires sustained primary budget surpluses (revenues exceeding non-interest expenditures) combined with GDP growth rates that exceed the effective interest rate on outstanding debt.

Critics of the current debt trajectory argue that elevated debt service obligations crowd out productive spending on education, healthcare, and infrastructure while creating vulnerability to interest rate shocks or economic downturns that could make the debt burden unsustainable. Defenders counter that much of the borrowed funds have financed critical infrastructure projects that will support long-term economic growth and tax revenue generation.

Market Outlook and Investment Considerations

For investors considering participation in the October Treasury Bond auction, several factors merit careful consideration. The coupon rates of 12.65% and 13.44% offer attractive nominal returns, particularly when compared to recent inflation rates averaging around 5-6%. This provides real returns of approximately 6-8% annually, competitive with many alternative investment opportunities available in Kenya’s financial markets.

The creditworthiness of the Kenyan government, while subject to some international concern given elevated debt levels, remains supported by the country’s diversified economy, strong institutions, and relationship with international financial organizations including the International Monetary Fund. Kenya has maintained its access to international capital markets and has not experienced payment defaults on its sovereign obligations.

The liquidity profile of these bonds, while not matching highly liquid assets like shorter-dated Treasury Bills, benefits from active secondary market trading on the NSE and the CBK’s rediscount facility providing backstop liquidity. For institutional investors with extended investment horizons, the periodic illiquidity of these securities may not pose significant concerns given their intention to hold to maturity.

Tax treatment of government securities provides an additional consideration, as interest income from Treasury Bonds and Bills enjoys preferential tax treatment compared to many alternative investments, enhancing after-tax returns for individual and some institutional investors.

Conclusion: Sustainable Financing or Growing Risk?

The Central Bank’s October bond auction, targeting KSh 50 billion through long-term securities, represents a continuation of Kenya’s debt financing strategy that relies heavily on domestic market capacity to fund government operations and infrastructure investments. The attractive yields being offered, combined with the previous month’s strong oversubscription, suggest that this auction will likely meet or exceed its targets.

However, the broader context of Kenya’s KSh 11.8 trillion public debt and substantial refinancing requirements approaching KSh 2 trillion annually raises legitimate questions about long-term sustainability. While current market conditions remain favorable and investor demand robust, maintaining this access will require continued fiscal discipline, economic growth, and careful debt management to prevent a deterioration in creditworthiness that could trigger a damaging cycle of rising borrowing costs and weakening investor confidence.

For the National Treasury, the immediate challenge is successfully placing the October bonds at acceptable yields while managing the continuous rollover of shorter-term securities. For investors, the decision whether to participate requires balancing attractive returns against assessments of sovereign credit risk and individual liquidity needs. For Kenya’s economy overall, the outcome will depend on whether borrowed funds finance productive investments that generate growth and revenues sufficient to service the mounting debt burden.

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By: Montel Kamau

Serrari Financial Analyst

16th October, 2025