Investors who bought the new 30-year Treasury bond were handed a nine percent discount on the price of the security after they demanded a higher interest return than what the State was willing to pay on the paper.
The bond came with a predetermined annual interest rate of 12.5 percent, but investors demanded to be paid 13.75 percent to buy the paper, hence the discount on the price to make up for the return shortfall.
The CBK said that successful bidders on the 30-year bond will pay Sh91.04 per bond unit of Sh100, effectively handing them a discount of Sh8.96 for each unit. A unit of a bond is priced at Sh100, but they can sell above or below this price depending on the prevailing demand when the papers are reopened.
The interest rate outlook has however shifted due to the threat of inflation due to the Iran war, with investors now anticipating higher returns in the near term if the CBK is forced to raise the base rate to fight higher inflation.
It also means that the cost of borrowing for government will go up due to the cash ceded in offering the discounts to investors.
For investors however, the lower prices are a direct upfront gain, considering that they will be paid interest and maturity settlements on the full face value of the bonds.
In the bonds market, interest rates and prices have an inverse relationship, where a fall in one results in an increase in the other.
Ideally, when the investor’s rate demands match what the government is willing to pay for a security, the buyer would pay exactly the face value of the security.
However, when investors ask for a return that is higher than a bond’s actual coupon or interest rate, the CBK offers a discount on the bond’s price to compensate the investors for accepting to earn below their desired return.
Alternatively, when investors indicate they are willing to take a return that is lower than a bond’s coupon rate, they end up paying a price premium to the CBK in order to secure the bond.
The CBK was thus forced to offer the price discount to attract buyers to its April issuance, which targeted Sh20 billion from the new bond and a reopened 30-year bond that was first sold in 2011 at an annual interest rate of 12 percent.
The issuance raised Sh30.06 billion from investor bids of Sh38 billion from the two bonds. The new 30-year bond netted Sh23.5 billion from offers worth Sh31.3 billion, while the reopened paper raised Sh6.6 billion from offers of Sh7.05 billion.
Similar to the new bond, the 2011 paper was also sold at a discount of Sh1.91 per unit of Sh100, after buyers demanded a return of 12.99 percent compared to its actual interest rate of 12.5 percent.
The government is collecting net of Sh27.82 billion from the two bonds, handing investors Sh2.24 billion in discounts on the papers.