Bond investors demanded more than 18 percent in interest in the auction for a reopened five-year bond whose sale closed last week, forcing the Central Bank of Kenya (CBK) to leave Sh33.9 billion worth of bids on the table.
The standoff over rates came even as the CBK said the Treasury has cut the domestic borrowing target for the current fiscal year from Sh586.5 billion to Sh316 billion, effectively signalling to the market an easing of the State’s high demand for domestic cash that has driven rates upwards in recent sales.
The difference of Sh270.5 billion has been transferred to the external target, which now rises to Sh402 billion from Sh131.5 billion, given that Kenya’s budget deficit for the current fiscal year remains at Sh718 billion.
While the CBK expressed optimism that there would be a quick impact on rates, analysts were more cautious, saying it would likely be seen only after the reduction was seen in the targets of securities offers and a drawdown of the enhanced external funding.
Under the new domestic target, the prorated net borrowing per month stands at Sh26.3 billion, down from Sh48.9 billion under the previous target.
“Overall, once the additional external financing starts to flow in, the lowering of the domestic borrowing target will likely reduce pressure on interest rates,” said analysts at NCBA in a fixed income note.
“Looking ahead, we expect a more substantial direction on the interest rate trajectory to start to manifest in the auctions scheduled for the end of quarter three and into quarter four of 2023.”
The CBK—which is the government’s fiscal agent— said on August 10 it had received a letter from the Treasury confirming the lower borrowing target, effectively authorising it to align its regular securities issuances with the lower quantum.
In the sale last week, investors offered the government Sh53 billion against a target of Sh40 billion for the dual-tranche bond, which comprised a new two-year paper and a reopened five-year, which was first sold last month.
The two-year attracted the bulk of the bids at Sh38.3 billion, with an average rate demand of 17.55 percent. The CBK took up Sh11.7 billion on this paper, at an average rate of 16.97 percent.
On the reopened five-year paper which came with a coupon rate of 16.84 percent, investor bids stood at Sh14.7 billion at an average demanded rate of 18.16 percent. The State accepted Sh7.45 billion on this tranche.
Since July 1, the government has taken up a net of Sh101.1 billion in bond sales, effectively putting it ahead of the target for the fiscal year—whether one considers the previous or the revised borrowing targets.
