The National Treasury has now shelved its earlier announced plan to offer switch bonds worth Sh204 billion to holders of securities maturing in April and May this year, indicating increased confidence in rolling over the amounts when they fall due without straining its ability to fund the budget.
A bond swap or switch occurs when the proceeds from the sale of one debt instrument are used to subsequently purchase another debt instrument. A switch bond issuance involves the direct conversion of maturing Treasury bills and bonds into longer-term securities, cushioning the exchequer from a liquidity crisis.
The government had indicated in its 2024/2025 annual borrowing plan that it would offer the switch options in November 2024 (Sh100.1 billion) and January 2025 (Sh104.5 billion), looking to avoid having to roll over these amounts in consecutive months towards the end of the fiscal year.
“By not offering these switch bonds, the Treasury is indicating that it is comfortable with how the domestic borrowing scenario has turned out and that the borrowing target will not be competing with rollovers or maturities in April and May,” said Churchill Ogutu, an economist at IC Group (Mauritius).
For the current fiscal year, the government has a net domestic borrowing target of Sh413 billion. It also needs to raise an additional Sh570 billion to refinance maturing debt, while also spending Sh750 billion in domestic debt interest payments.
The new bonds that the government lined up under the switch plan were intended to have had a tenor of between five and 10 years.
November’s switch targeted a maturing three-year bond that has an outstanding value of Sh60.6 billion, and a partial maturity (amortisation) of about Sh40 billion on a nine-year, Sh118.5 billion infrastructure bond. Both repayments which are due on April 7, 2025.
The January switch was meant to retire a five-year bond that was floated in May 2020, whose outstanding amount is Sh104.5 billion. While silent on the switch paper, the government has this month sold a pair of reopened 15- and 25-year papers first issued in 2018 and 2022, with a combined target of Sh30 billion. The sale, which is part of the regular monthly bond issuance, closed on Wednesday.
Domestic debt maturities are usually funded by rolling over the debt via new bond issuances, and rarely through repayments from tax collections since the government is already running a budget deficit.
Refinancing the debt through ordinary bond sales, however, means that rollovers can affect the government’s ability to make new borrowing for budgetary purposes, especially when these bonds are undersubscribed.
Swapping a bond, therefore, helps avoid the competition for funds between maturities and new borrowing.
The Treasury brought its first such bond in June 2020, offering investors a six-year infrastructure paper in exchange for a maturing one-year Treasury bill. This netted Sh20.2 billion out of a target of Sh25.6 billion.
The second switch bond was sold in December 2022, seeking Sh87.8 billion via a six-year infrastructure bond, targeting holders of maturing Treasury bills worth Sh31.96 billion and a maturing two-year bond that had an outstanding amount of Sh55.85 billion.
This swap raised Sh47.8 billion, with holders of the two-year bond accounting for the bulk of the switch at Sh39 billion.
