Serrari Group

In the upcoming January 2024 Treasury bond sale, investors are preparing for a formidable challenge as interest rates are predicted to surge beyond the 18 percent mark. This projection stems from thorough analyses by reputable investment banks, including Genghis Capital, Sterling Capital, and AIB-AXYS Africa.

The bond offering consists of a new three-year bond and the third reopening of a five-year bond initially sold in July. While the interest rate for the three-year bond will be market-determined, the five-year paper has witnessed a consistent uptrend in rates. Starting with an original coupon rate of 16.84 percent, subsequent reopenings in August and October pushed rates up to 17.95 percent and 17.99 percent, respectively.

Sterling Capital’s assessment suggests a Weighted Average Rate for accepted investor bids between 18.29 – 18.39 percent for the three-year and 18.39 – 18.49 percent for the five-year. Genghis Capital anticipates bids for the three-year paper to range between 18.45 and 18.5 percent and between 18.65 and 18.85 percent for the five-year option. AIB-AXYS Africa recommends bids of 18.55 – 18.75 percent for the three-year bond and 18.62 – 18.82 percent for the five-year paper.

The outlook is influenced by the recent two-percentage-point increase in the Central Bank of Kenya’s base rate to 12.5 percent and the government’s upward revision of the domestic borrowing target to Sh474.5 billion from Sh415.1 billion. This signals an increased government appetite for funds, diminishing the likelihood of the Central Bank rejecting bids.

Analysts at AIB-AXYS Africa emphasize the regulator’s scrutiny of the Sh199.3 billion worth of domestic debt coupon and principal repayments due in January. They anticipate a substantial portion of the bond will be directed towards rolling over maturities, compelling the government to consider higher yield payouts to meet net domestic borrowing requirements and manage potential liquidity risks.

Furthermore, the pricing of the tax-free infrastructure bond sold in November, offering an attractive interest rate of 17.93 percent, is expected to influence bid pricing for the January Treasury bond sale. As investors navigate these challenges, the bond market remains vigilant, with all eyes on the outcome of the upcoming auction and its potential implications for the broader financial landscape.

By: Montel Kamau
Serrari Financial Analyst
10th January, 2023

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