The second tranche of the Sh80 billion May Treasury bond sale raised an above-target Sh43.52 billion, as investor appetite for longer dated securities persisted amid falling returns on new issuances.
The reopened 20-year bond, which has 7.6 years to maturity, targeted Sh30 billion but ended up raising investor bids of Sh54.39 billion, out of which the Central Bank of Kenya (CBK) took up Sh43.52 billion.
The bond, which carries a coupon (actual payable interest rate) of 12 percent, had an effective yield of 13.64 percent on accepted bids.
This meant that the CBK offered a discount of Sh7.60 per bond unit of Sh100 to make up the difference between the coupon and the rate demanded by buyers.
It was the second tranche of the month’s issuance, with the first being a reopening of 15-year and 25-year bonds which raised Sh50.4 billion against their combined target of Sh50 billion. The sale of the two bonds closed on April 30, with investor bids standing at Sh57.1 billion.
In total, the month’s sale has raised a total of Sh100.6 billion against a target of Sh80 billion.
The bonds were sold against a background of falling yields on securities following the recent cuts in the Central Bank rate (CBR) from 13 percent in August 2024 to 10 percent in April—meaning that there is an expectation that rates on new issuances will fall lower in coming auctions.
This has prompted the demand for bonds coming into the market at yields of above 13 percent, as investors look to lock in the present rates before the expected decline.
“We expect optimal subscription of the 20-year bond given high market liquidity and growing investor appetite for medium and longer tenor debt with the decline in interest rates,” said analysts at Sterling Capital in a note ahead of the bond sale.
It was also floated at a time when tax collections remained below expectations, pressuring the government to raise its borrowing to cover the expanded budget deficit. The higher appetite for debt financing partly informed government’s decision to take an additional Sh20.6 billion from the May bond.
The Treasury has twice revised downwards its tax collection target in the current financial year, while raising the borrowing target in turn.
The second supplementary budget which was signed in March lowered the tax collection target by Sh51 billion to Sh2.58 trillion, from Sh2.63 trillion that was in the first supplementary budget that was approved in August 2024.
The Supplementary I Budget had also cut the tax revenue target from the Sh2.92 trillion that was passed in the June 2024 budget estimates.
On the borrowing end, the domestic debt target has also undergone two revisions—going up from the June 2024 budget target of Sh263.2 billion to Sh413.1 billion in the first supplementary budget, and further to Sh605.7 billion in the second supplementary vote.
At the same time, the Treasury revised its net target from external borrowing from Sh333.8 billion in June 2024 to Sh355.5 billion in August, before cutting it to Sh281.5 billion in Supplementary II after agreeing to shelve the last review of its $3.6 billion funding programme with the International Monetary Fund ahead of expiry in April.
