The first Treasury bond sale of the 2025/26 fiscal year raised Sh66.65 billion, beating its target of Sh50 billion as investors raced to secure the relatively high returns available on the paper.
The Central Bank of Kenya (CBK) in the July sale reopened a pair of 20- and 25-year papers, which were first introduced into the market in 2018.
The 20-year bond attracted bids worth Sh33.08 billion, out of which the CBK took up Sh30.57 billion, while the uptake from the 25-year paper stood at Sh36.08 billion from offers of Sh43.83 billion.
The CBK also rode on ample liquidity in the market to kick off its new year borrowing programme on a high note.
“We expect over subscription on these issues on account of high market liquidity and growing investor appetite for medium and longer tenor debt with the decline in interest rates,” analysts at Sterling Capital said in a note ahead of the bond sale.
The 20-year bond, which has 12.8 years to maturity, came with a coupon (actual payable interest rate) of 13.2 percent, while the 25-year bond has a coupon of 13.4 percent and 18 years to maturity.
Investors asked for an average return of 13.94 percent on the 20-year paper, and 14.43 percent on the 25-year, well aware of the government’s large budget deficit of Sh923.2 billion for the current fiscal year.
The average yield on the 20-year bond settled at 13.89 percent, while the yield on the 25-year bond settled at 14.34 percent. To make up for the difference between the coupon and yields, the CBK offered price discounts of Sh4.16 and Sh6.08 respectively per bond units of Sh100.
In primary sales, the CBK offers price discounts to buyers in order to compensate them for taking up bonds that carry a lower fixed interest rate than they had asked for (represented by the asking yield) in order to lend to the government.
Investors are, however, paid interest at the coupon rate, and upon maturity of the bond, they are given back the face value of their paper.
Despite the higher returns demanded by investors in the July sale, the CBK took up more than the target, with an eye on the large borrowing needs for the 2025/26 fiscal year.
The funding deficit of Sh923.2 billion will be financed through domestic borrowing of Sh635.5 billion and external borrowing worth Sh287.7 billion.
This projected deficit is, however, lower than the Sh997.5 billion hole in the previous fiscal year that ended on June 30, for which the domestic financing component stood at Sh815.6 billion and external borrowing at Sh184.29 billion.
For investors, it made sense to lock in the two papers at the prevailing coupons, with interest rates expected to fall going forward in line with the recent cut in the central bank rate to 9.75 percent.
The spread between the interest returns on the short term Treasury bills and the bonds has also widened to nearly four percentage points, making the bonds more attractive despite their much longer tenor.
