In a strategic move aimed at avoiding long-term commitments to high interest rates, the National Treasury of Kenya has turned to multiple reopenings of four short-term bonds, raising an impressive Sh222 billion since May.

These bonds, boasting maturities ranging from two to five years, have seen interest rates soar to nearly 18 percent, a remarkable four percentage points higher than the yields demanded for the same duration just three months ago.

Among the bonds revisited is a 10-year paper initially issued in August 2016, with three years left to maturity. When first sold seven years ago, it raised Sh18.3 billion. However, in July, it was reopened, raising Sh15.7 billion, followed by a tap sale, which garnered the government an additional Sh31.23 billion. Remarkably, this paper underwent its second reopening earlier this month, resulting in a further Sh6.6 billion injection.

Another bond with a three-year duration made its debut in May, raising Sh20.3 billion. It was subsequently tapped thrice before the end of June, bringing in an impressive additional Sh56.4 billion for the national exchequer.

July saw the government conducting a primary sale of a five-year bond, closely followed by a tap sale. August witnessed yet another reopening of the same paper, accompanied by a tap sale, culminating in a total of Sh48.6 billion from the four sales.

Even a two-year bond, first floated just last month, has experienced two reopenings, one through a tap sale and another via a reopening this month, accumulating a total subscription of Sh44 billion from these sales.

In addition to these short-term bonds, the State achieved a significant windfall of Sh213.4 billion from a seven-year infrastructure bond in June.

The decision to predominantly utilize short-dated bonds for budgetary financing has effectively mitigated the duration of exposure to high interest rates. Investors, who have been actively seeking higher rates, have demanded up to 18.5 percent on average for the September reopening of the 10-year bond, and 17.58 percent for the two-year reopening.

Despite bids totaling Sh34 billion on these bonds, the Central Bank of Kenya (CBK) opted to accept Sh21.6 billion, at average rates of 17.92 percent and 17.45 percent for the 10 and two-year bonds, respectively.

Analysts at Sterling Capital commented on this trend, stating, “While this maintains the CBK’s signal to investors that it will not yield to investor pressure to accept expensive debt, the rates being accepted at each subsequent auction still signals the opposite.”

This aggressive bidding has persisted despite the government signaling a reduction in net domestic borrowing for the current fiscal year. The target was slashed to Sh316 billion from Sh586.5 billion, with the burden shifting to external lenders. However, analysts anticipate that the market will continue to exert pressure on the government to secure favorable rates until external financing begins to flow into the country.

Photo Source: Google

September 17, 2023
Delino Gayweh
Serrari Financial Analyst