The Central Bank of Kenya (CBK) has opened the sale of a Sh10 billion switch bond that is offering higher return to holders who accept the swap, after the last such issuance flopped when investors were asked to take a rate haircut.
At the same time, the CBK has reopened three other bonds for the May 2026 monthly sale, targeting Sh80 billion as it races to fill the Treasury’s expanded domestic borrowing target of Sh998 billion.
In the switch offer-the fourth one done this year-the CBK has asked holders of a 10-year bond that matured in July 2027 the opportunity to move to a 20-year bond that matures in 2041. The 10-year bond pays annual interest of 12.96 percent, compared to the 20-year’s rate of 13.44 percent.
By offering higher return on the 20-year paper, the CBK is hoping to avoid a repeat of the flop of the April 13 switch bond auction, where investors agreed to swap just Sh1.75 billion against a target of Sh20 billion.
In that sale, the CBK asked investors to swap from 10-year paper that matures in August into a 15-year bond that comes due in 2033. The 10-year paper has been paying holders 15.04 percent in annual interest, while the 15-year pays 12.65 percent.
Speaking earlier in the week, CBK Governor Kamau Thugge attributed the poor performance of the April 13 bond to a wait and see approach from investors, due to the geopolitical uncertainty around the Iran war.
‘In the previous ones we did relatively well, but right now there’s a wait and see approach since too many things are happening. That’s why there was underperformance in the latest one,’ said Dr Thugge.
He added that the CBK remained committed to future swap bond sales, terming them a legitimate tool of liability management that helps to stretch out repayments and cut the government’s debt refinancing risk.
According to analysts, the market has taken cue of the potential inflationary pressure due to the war, and is now adjusting its rate expectations upwards. This led to the rejection of the lower paying paper in the sale.
Earlier switch sales done in January and March had both been oversubscribed. They offered higher rates on the destination bonds at a time when interest rates were falling.
Beyond testing the appetite for switch bonds, the CBK has selected papers with relatively high coupons for reopening in May, pointing to an attempt to entice the market at a time when investors are increasingly wary of rising inflationary pressures stemming from spillovers of the war in Iran.
The sale comprises a pair of 20-year papers that were first issued in 2012 and 2019, and a 25-year bond that was first put to market in 2021. The 2012 bond has a coupon of 12 percent, the 2019 paper 12.87 percent, and the 25-year pays 13.92 percent.
Documents seen by the Business Daily show that in addition to the three bonds, the State will also reopen a further two papers in May, targeting an additional Sh50 billion, taking the month’s total targeted issuance to Sh130 billion.
The second auction will see the CBK reopen a 15-year paper from 2019 and a 20-year bond from 2021.
The planned reopening of five papers comes against the backdrop of total revenue collection having stood at Sh2.04 trillion in the first three quarters of the current financial year, falling behind the prescribed target by Sh84 billion.
The revenue shortfall now leaves the government grappling with elevated funding pressures with Supplementary Budget I having increased the domestic borrowing target by 57.3 percent to Sh998.6 billion.
However, Dr Thugge sought to allay fears that the higher borrowing target will push interest rates upwards, saying the CBK has already borrowed a net of Sh850 billion domestically, meaning only about Sh150 billion is pending to hit the new target.
I believe with that, we can meet that borrowing target without adding a lot of pressure on interest rates,’ Dr Thugge told Business Daily in an interview.
Earlier in the year, the CBK had frontloaded on the domestic debt, taking advantage of higher investor demand for government securities and a liquid money market.