Kenya’s T-bill yields hit lowest since June 2022 as CBK rate cut drives shift to long-term bonds

Kenya’s financial markets are experiencing a significant shift, with Treasury Bill (T-bill) yields plummeting to their lowest levels since June 2022. This sharp decline follows a recent, impactful interest rate cut by the Central Bank of Kenya (CBK), a move designed to stimulate economic activity and ease the cost of borrowing. As short-term returns dwindle, a clear trend is emerging: large institutional investors are strategically redirecting their capital towards higher-yield, longer-term government bonds, fundamentally reshaping the landscape of domestic government debt.

The most recent CBK auction saw the bellwether 364-day T-bill’s yield fall by a notable 25 basis points (bps) to 9.75%, precisely aligning with the Central Bank’s newly lowered policy rate. The shorter-dated 91-day and 182-day T-bills also registered significant drops, settling at 8.18% and 8.49% respectively. While this spells relief for the government’s borrowing costs, it forces investors, particularly those accustomed to higher returns from short-term papers, to recalibrate their strategies.

The Central Bank’s Calculated Maneuver: Calibrating Economic Growth

The recent interest rate cut by the Central Bank of Kenya is the culmination of a series of strategic decisions by its Monetary Policy Committee (MPC). The MPC is the apex decision-making body at the CBK responsible for formulating and implementing monetary policy, with its primary objective being to achieve and maintain price stability in the general level of prices. In simpler terms, their job is to keep inflation low and stable, thereby sustaining the value of the Kenya Shilling and fostering an environment conducive to long-term investment and economic stability.

The CBK reduced its prime lending rate, known as the Central Bank Rate (CBR), by 25 basis points to 9.75% on June 10, 2025. This followed an earlier, larger cut in April, bringing the rate down from 10.75% to 10%. This marks the sixth consecutive rate cut since August 2024, when the prime rate stood at 13%. The rationale behind these successive cuts is rooted in a positive macroeconomic outlook, particularly easing inflation and a stabilized exchange rate.

Kenya’s overall inflation declined to a comfortable 3.8% in May 2025, down from 4.1% in April, and notably remaining well below the midpoint of the CBK’s target range of 5% ± 2.5%. The MPC noted that inflation is expected to remain anchored below this target, supported by stable food and energy prices and a steady exchange rate. This sustained period of manageable inflation has provided the CBK with the crucial room to implement an accommodative monetary policy, aiming to boost private sector lending and invigorate economic activity.

While Kenya’s economic growth slowed slightly to 4.7% in 2024 (from 5.7% in 2023), early 2025 indicators showed improvement, prompting the CBK to project a GDP growth of 5.2% for 2025. The rate reductions also follow persistent calls from commercial banks, which argued that the improving inflation and exchange rate environment justified lower borrowing costs to stimulate credit expansion. The International Monetary Fund (IMF) has also acknowledged a return of market confidence, with easing external funding pressures, a stabilized Kenyan Shilling, and improved foreign exchange reserves.

Decoding Government Securities: T-Bills vs. Bonds

To truly grasp the significance of these market movements, it’s essential to understand the instruments at play: Treasury Bills and Treasury Bonds. Both are forms of government securities, essentially mechanisms through which the Kenyan government borrows money from the public and institutions to finance its expenditures and manage its cash flow. They are considered among the safest investments in Kenya because they are backed by the full faith and credit of the government and are managed by the Central Bank of Kenya.

• Treasury Bills (T-bills): These are short-term debt instruments, typically with maturities of 91, 182, or 364 days. Unlike bonds, T-bills do not pay interest periodically. Instead, they are sold at a discount to their face value. Investors make money by purchasing the bill at a lower price and receiving the full face value at maturity. For example, if you buy a 91-day T-bill with a face value of KSh 100,000 for KSh 98,000, you earn KSh 2,000 at maturity. They are popular for managing short-term liquidity and typically attract minimum investments of KSh 100,000.
• Treasury Bonds (T-bonds): These are medium to long-term investments, with maturities ranging from 1 year to 30 years. Bonds pay investors fixed interest payments, known as “coupon payments,” typically every six months throughout the bond’s term. At the end of the bond’s maturity, the investor receives their initial invested amount (the face value). Bonds generally offer higher yields than T-bills to compensate investors for locking up their money for a longer period and for the increased exposure to interest rate risk. The minimum investment for a Treasury Bond is KSh 50,000.

Both T-bills and T-bonds are issued through competitive auctions conducted by the Central Bank of Kenya on behalf of the National Treasury. The yields (or discount rates for T-bills) are determined by the interplay of supply and demand from investors.

The T-Bill Tumble: Auction Dynamics Unpacked

The latest T-bill auction results vividly illustrate the market’s response to the CBK’s rate cut. The government offered a total of KSh 24 billion across the three T-bill tenors. However, the investor appetite was highly differentiated.

The 91-day bill was a standout, attracting massive demand with a staggering 364.9% subscription rate. This reflects a persistent trend among many retail investors who, often driven by a need for short-term liquidity and a perception of lower risk, continue to chase these shorter-dated papers. The government, in response to this overwhelming demand, accepted KSh 6.61 billion in net new borrowing from this tenor.

In stark contrast, competitive bids for the longer-dated 182-day and especially the 364-day T-bills remained notably weak. Despite advertising KSh 10 billion for each of these papers, the government only secured KSh 2.57 billion on the 182-day paper and a mere KSh 2.99 billion on the 364-day paper. This signals a clear waning of interest from investors, particularly larger institutions, in longer-term T-bills at these now lower yields.

Out of the KSh 24 billion total offered, the government ultimately accepted KSh 17.2 billion. Of these proceeds, KSh 10.86 billion was dedicated to rolling over maturing securities – essentially repaying old debt by issuing new debt. This highlights the government’s constant need to manage its existing debt obligations. The net new borrowing amounted to KSh 6.61 billion from the 91-day bill, KSh 622 million from the 182-day, and a paltry KSh 347 million from the 364-day paper. This skewed allocation of new borrowing underscores the market’s current preference for short-term government paper, making it more challenging for the Treasury to raise longer-term funds through T-bills alone.

The Lure of Longer-Term Bonds: A Strategic Pivot

With T-bill rates sliding below the 10% mark, the spotlight has decisively shifted to higher-yield, longer-term government bonds. Large institutional investors, such as pension funds, insurance companies, and even some foreign investors, are now actively redirecting their funds towards reopened bonds like the Savings Development Bond (SDB) 1/2011/030 and the Fixed Coupon Treasury Bond (FXD) 1/2020/015.

These reopened papers offer significantly more attractive returns:

• FXD1/2020/015: With approximately 9.7 years remaining to maturity, this bond offers a fixed coupon rate of 12.756%.
• SDB1/2011/030: This bond, with around 15.7 years to maturity, provides a fixed coupon rate of 12.0%.

For institutional investors, the appeal is twofold:

1. Higher Yields: These bonds offer a substantial yield premium compared to the sub-10% T-bill rates, providing a better return on their investments over a longer horizon.
2. Potential Capital Gains: In a “rate-cutting cycle,” where interest rates are expected to continue declining, existing bonds with higher fixed coupon rates become more valuable. If market interest rates fall further, the price of these older, higher-yielding bonds will increase, offering investors the opportunity for capital gains if they choose to sell before maturity. This makes them particularly attractive to sophisticated investors looking to optimize their portfolio returns in a declining interest rate environment.

This strategic shift by institutional players is crucial for the government. While T-bills provide short-term liquidity, long-term bonds are essential for funding large-scale infrastructure projects and ensuring fiscal stability by locking in borrowing costs over extended periods.

What This Means for Everyday Kenyans

Beyond the financial jargon and market dynamics, these shifts in interest rates and government borrowing have tangible impacts on the lives of ordinary Kenyans.

For Savers and Retirees:

Many Kenyans, particularly retirees or those with a low-risk appetite, have historically relied on T-bills for a stable, relatively high-yield income. The sharp drop in T-bill yields means that their traditional savings vehicles are now offering significantly less attractive returns. This can pose a challenge for individuals dependent on these fixed-income investments for their livelihood or retirement planning. They may need to reconsider their investment strategies, potentially exploring other avenues like diversified unit trust funds, sacco deposits (though these carry different risk profiles), or even longer-term bonds if they meet the minimum investment requirements and are comfortable with the longer tenor.

For Borrowers – The Promise of Cheaper Credit:

This is where the CBK’s rate cut is designed to have its most direct positive impact. Lower T-bill yields and a reduced CBR should ideally translate into lower lending rates from commercial banks. For individuals with existing loans (mortgages, personal loans) or those looking to borrow, this means reduced monthly repayment burdens or more affordable access to credit.

However, the transmission mechanism from the CBR to actual commercial lending rates isn’t always immediate or uniform. While some banks, like Equity Bank, have proactively lowered their lending rates in response to CBK cuts, others have been slower to adjust. The average lending rate in Kenya was still around 16.44% as of February 2025, considerably higher than the CBR. This discrepancy is partly due to Kenya’s risk-based loan pricing model, where banks set rates based on a borrower’s perceived risk profile. The CBK has been pressing banks to pass on the benefits of lower rates to customers to truly stimulate private sector credit growth.

For Businesses – Fueling Growth and Innovation:

Small and Medium-sized Enterprises (SMEs), often the backbone of Kenya’s economy and a major source of employment, are particularly sensitive to the cost of credit. High borrowing costs have historically constrained their ability to invest, expand, and create jobs. Lower interest rates, when effectively passed on by banks, can significantly reduce the cost of doing business, making it easier for SMEs to access working capital, invest in new equipment, or expand operations. This can lead to increased productivity, higher employment rates, and overall economic vibrancy. The CBK’s decision to lower the Cash Reserve Ratio (CRR) by 100 basis points to 3.25% in February 2025 was also aimed at releasing additional liquidity to banks, further encouraging lower lending rates and supporting credit growth to the private sector.

For the Government – Managing the National Debt:

For the National Treasury, the falling yields on T-bills translate directly into reduced borrowing costs. This is a crucial relief for a government grappling with high public debt, which stood at around 63% of GDP in present value terms. Lower interest payments free up fiscal space, allowing the government to allocate more funds towards essential public services and development projects rather than debt servicing. The government aims to progressively reduce its public debt-to-GDP ratio to 55% by 2028 and has outlined a budget deficit target of 4.3% of GDP for FY 2025/26, aiming for 2.7% by FY 2028/29. The ability to secure cheaper domestic financing is vital for achieving these fiscal consolidation goals. The government is also exploring diversified funding instruments, including debt swaps, diaspora bonds, sustainability-linked bonds, and Shariah-compliant products like Sukuk bonds, to broaden its financing options and promote sustainable growth.

Kenya’s Economic Horizon: Navigating a Complex Macro Landscape

Kenya’s economic trajectory in 2025 and beyond is shaped by a confluence of factors. The current easing of inflation to 3.8% in May is a positive sign, reflecting stable food and energy prices and a strengthened Kenyan Shilling. The CBK anticipates inflation to remain within its target range, driven by these favorable domestic factors and potentially subdued domestic demand.

However, challenges persist. While the overall economic growth forecast for 2025 is positive at 5.2%, it has seen a slight downward revision due to factors like higher trade tariffs. High public debt remains a key concern, though the government is committed to fiscal reforms, transparency in debt management (including integrating debt management systems and conducting comprehensive public debt audits), and a shift towards more concessional loans from multilateral and bilateral sources.

Global factors also loom large. US-China trade tensions, ongoing conflicts in Ukraine and Palestine, and cautious rate-cutting by major global economies can all influence Kenya’s external trade, capital flows, and overall economic stability. Despite these external pressures, the recent stabilization of the Kenyan Shilling and improved foreign exchange reserves signal a return of market confidence, providing a stronger foundation for the economy.

Historical Context and Future Outlook

Kenya has a history of navigating significant interest rate fluctuations. In 2016, the country introduced interest rate caps, an attempt to control lending rates that, while aiming to ease the burden on borrowers, inadvertently led to a significant decline in aggregate lending, an increase in non-performing loans, and a shift in lending away from SMEs towards safer corporate clients. This experience underscored the complexities of direct interest rate interventions and paved the way for the current market-driven approach to rate setting.

Looking ahead, the current rate-cutting cycle by the CBK is likely to continue as long as inflation remains contained and the economic growth trajectory needs stimulus. This implies that T-bill yields may continue to hover at lower levels, and the appeal of longer-term bonds, particularly those with attractive fixed coupons, will persist. The government’s borrowing strategy will continue to evolve, balancing the need for domestic financing with efforts to secure external concessional funding and explore innovative financial instruments.

The interplay between monetary policy, fiscal policy, and market dynamics will determine the speed and breadth of economic recovery and job creation. The shift in investor behavior towards longer-term bonds is a vote of confidence in Kenya’s long-term economic stability, albeit a pragmatic response to the immediate decline in short-term yields.

Conclusion: Adapting to a New Financial Equilibrium

The recent sharp drop in T-bill yields, driven by the Central Bank of Kenya’s decisive rate cuts, marks a significant recalibration in Kenya’s financial markets. It reflects a maturing economy where inflation is becoming more manageable, allowing for monetary easing. The concurrent pivot by institutional investors towards longer-term government bonds underscores a broader market adjustment, where sophisticated players seek value and stability in a changing interest rate environment.

For the Kenyan government, this shift offers a dual benefit: reduced short-term borrowing costs and a sustained appetite for longer-term debt, crucial for financing the nation’s development agenda. For ordinary Kenyans, the impact is multifaceted – while savers face lower returns on traditional short-term instruments, the promise of cheaper credit holds the potential to unlock new opportunities for individuals and businesses, fostering investment, growth, and ultimately, a more inclusive and prosperous future for the nation. The journey towards a more resilient and diversified Kenyan economy continues, with interest rates playing a vital role in guiding its path.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

13th June, 2025