The Central Bank of Kenya (CBK) rejected Sh31.2 billion in offers from bond investors in the second auction of September after they demanded higher returns amid fears of renewed inflation pressure due to an escalation of the Middle East conflict.
The auction was made amid rising tensions in the Middle East after Houthi rebels in Yemen attacked the Red Sea shipping route and a key oil pipeline in Saudi Arabia, effectively crippling supplies from the world’s biggest producer and a key source of fuel for Kenya.
The escalation of the conflict has already sent the US 10-year bond yield above five percent for the first time since 2023 due to inflation concerns, setting the stage for higher rates globally.
In the bond auction on Wednesday, CBK was targeting Sh60 billion from a reopened 20-year bond from 2019 which pays annual interest of 12.87 percent, and a 30-year paper first issued in April 2026 at a rate of 12.5 percent.
Investors offered the apex bank Sh81.4 billion, out of which the CBK accepted Sh50.18 billion, meaning the sale fell short of target by Sh9.82 billion.
The high volume of rejections reflected the demands by investors for higher returns relative to the coupon or actual interest rates payable on the bonds.
On the 30-year bond, investors asked for a return of 14.47 percent, which was two percentage points higher than the paper’s actual coupon. Offers on this bond stood at Sh37.6 billion, with the CBK accepting Sh16.7 billion at a yield of 14.23 percent.
On the 20-year bond, investors offered the CBK Sh43.8 billion at an average asking yield of 13.67 percent, out of which the bank took up Sh33.5 billion at a yield of 13.61 percent.
The yields in the reopened bonds represent the rate at which investors are comfortable to lend to the government at that particular time.
In cases where these yields are higher than the bond’s actual coupon, the CBK offers the buyers a discount on the price of the paper to make up for the difference.
Alternatively, if investors ask for yields that are lower than a bond’s actual interest rate, then they pay the government a premium on the price of the bond in order to secure the paper. This normally happens when the government reopens a high paying bond at a time when interest rates are falling.
Ideally, a unit of a bond is priced at Sh100, with investors getting a return from the paper’s fixed interest rate.
For the 30-year bond, the price settled at Sh93.27 per bond unit of Sh100, due to the discount to cover for the yield-coupon difference. On the 20-year bond, the price was a slight premium of Sh101.54 despite the higher yield, given that it pays its next semi-annual interest in just two weeks’ time.
This was the second Treasury bond issuance this month, after the earlier auction of reopened 15 and 30-year papers on September 2 which netted Sh47.7 billion against a target of Sh60 billion.
This means that the monthly issuance has netted Sh97.92 billion against the target of Sh120 billion, from investor offers of Sh149.6 billion.
The National Treasury and CBK were however not under pressure to borrow at all costs coming into the September sale, given that the State had already netted Sh406 billion in net domestic borrowing it achieved in July and August.
This borrowing in the first two months of the fiscal year was equivalent to 41 percent of the full year target of Sh987.4 billion.
With the additional borrowing of Sh97.92 billion in September, the net borrowing has now hit 51 percent of the year’s target, given that there were no bond maturities falling due this month and Treasury bill maturities have generally been refinanced through rollovers.