The government has opened a tap sale on one of the 10-year bonds sold earlier this month, looking to mop up part of the Sh19 billion it left on the table from investor offers in the issuance.
October’s bond issuance comprised two reopened 10-year papers first sold in 2016 and 2022, which carry coupons (actual interest rate) of 15.04 per cent and 13.49 per cent, respectively.
The tap sale has been opened on the 2022 paper, targeting Sh15 billion in a sale that opened on Monday and will run until tomorrow.
Investors offered the government Sh50.96 billion for the two papers, whose combined target was Sh30 billion. The Central Bank of Kenya (CBK) took up Sh31.27 billion as it rejected bids it deemed to be expensive.
The 2022 paper was the more popular option among investors—hence the decision to tap it—attracting bids of Sh36.6 billion against Sh14.3 billion for the 2016 option. The amount taken up by the government on the 2016 paper stood at Sh28.02 billion.
By turning down the Sh19 billion worth of bids, the CBK was able to keep the effective yield of the bonds below 17 per cent, even as investors demanded average returns of 17.06 per cent and 17.34 per cent on the 2016 and 2022 bonds respectively.
The rate of return earned by investors does not have to match the coupons since the CBK offers discounts when a lower-yielding security is reopened in a high-interest-rate environment.
The bond discounts serve to lift the effective rate of return since the interest is paid on the face value of the bond and an investor will also be paid the full principal at redemption despite paying a lesser amount when buying the bond due to the discount.
A tap sale pays the same return as that of accepted offers on the initial or primary sale, and it therefore allows the CBK to take up additional funds without compromising on the interest rate at which it is willing to borrow.
Analysts had projected that bidders would ask for relatively higher returns on the October bond, in line with recent auction trends, partly to lock in attractive returns before rates come down after the CBK made a 75 basis point cut on its base lending rate in last week’s monetary policy committee (MPC) meeting.
At the same time, there was an expectation that the CBK would reject expensive offers, partly to back its stance on lowering rates, but also because the government remains on target within its domestic borrowing plan.
The CBK has also been keen to lower the cost of funds in the economy, looking to improve lending to the private sector whose annualised rate of growth fell to 1.3 percent in August, compared to 13.9 percent at the beginning of 2024.
