Investors rejected a government offer to switch from costly maturing bond to a new cheaper security, forcing the State to pay them Sh18.2 billion in August.
The Central Bank of Kenya (CBK) offered holders of a 10-year bond, which is maturing in August, a chance to swap Sh20 billion with 15-year paper that will mature in 2033 to ease financing pressure on the Treasury.
Investors offered to switch Sh2.56 billion in the sale, with the CBK taking up Sh1.75 billion. This means that the Treasury will have to pay the balance of Sh18.2 billion in August.
Investors offered to switch Sh2.56 billion in the sale, with the CBK taking up Sh1.75 billion.
The 10-year paper has been paying holders 15.04 percent in annual interest, while the 15-year paper bond, which has been in the market since May 2018, is offering investors 12.65 percent.
Before the start if the Iran war at the end of February, interest rates were expected to keep declining in line with the sustained monetary easing actions of the CBK.
The apex bank had cut its policy rate by a cumulative 4.25 percentage points to 8.75 percent in 10 straight monetary policy committee (MPC) meetings between August 2024 and February 2026.
The CBK halted the easing in last week’s MPC meeting with a hold at 8.75 percent, pointing to concerns about emerging inflationary pressure from higher energy prices.
According to analysts, the market has taken cue and is now adjusting its rate expectations upwards. In such instances, investors would prefer to hold on to a liquid position, in order to be able to take advantage of higher rates in case inflation goes up in the near term.
‘While the MPC forecasts inflation to remain contained with the target range in the near term, the overall impact of higher inflation expectations on the yield curve is somewhat emerging. This is reflected in the mid-to-long segments of the government securities yield curve, where an average increase of 20 basis points has been observed,’ said analysts at NCBA Investment Bank in a fixed income note.
‘Investors seem to be increasing their required rates of return on investments as a safe-guard against anticipated inflationary pressures.’
A switch bond issuance involves the direct conversion of maturing Treasury bills and bonds into a longer term security, cushioning the exchequer from a liquidity crisis in the short term.
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 competition for funds between maturities and new borrowing.
For the CBK, the timing of the war is now a threat to its efforts to extend the maturity profile of government debt at a lower cost through such switch bonds.
The April swap was the third one in 2026, but was the only one to be undersubscribed.
The first of the swaps was done in January 2026, and also involved the 10-year, 2016 paper that was being switched in the April sale. In the sale, investors agreed to roll over Sh25.17 billion worth of notes into a 15-year paper that was floated in 2022, at an annual interest rate of 13.94 percent.
The second switch sale targeting Sh15 billion was carried out last month, where holders of a five-year bond of a coupon of 11.37 percent that is due to mature in November this year transferred Sh18.4 billion into a 15-year bond that was issued in 2019 at 12.34 percent.