The government has raised Sh25.7 billion from the first of two bond auctions this month, even as the Central Bank of Kenya continued to reject higher priced bids in efforts to bring down interest rates.
November’s bond issuance comprises a 15-year paper whose initial sale was in April 2022, a 10-year paper first sold in February 2023 and another 10-year paper which was first floated in March this year.
The 2022 and 2023 papers, whose auction closed on Wednesday, raised a combined Sh25.7 billion against a target of Sh25 billion, from bids of Sh33 billion. The sale of the other paper, which targets Sh20 billion, closes next week.
Investors rushed to lock in higher yielding papers amid falling interest rates, while the CBK was wary of committing to expensive debt with an eye on cheaper funds in the near term.
“This shows a resolve by investors to lengthen their bond duration in a bid to lock in current higher yields given that interest rates are on a declining trend,” said Sterling Capital in a note on the bond.
“We however note a low acceptance rate of 60.7 percent as CBK continues to tame aggressive bidding to lower borrowing costs despite the government’s high budgetary requirements.”
The coupon (actual interest rate) on the 15-year 2022 bond stands at 13.94 percent, while that of the 2023, 10-year tranche is 14.15 percent. The 10-year 2024 paper meanwhile carries a coupon of 16 percent.
Investors asked for an average return of 16.15 percent on the 10-year 2023 paper, with the accepted bids yielding an average of 15.97 percent including discount on the principal.
On the 15-year paper, bidders demanded an average of 16.38 percent, with the CBK offering 16.29 percent.
The difference between the yields and the coupon rate was made up through price discounts of Sh4.73 for the 10-year and Sh11.63 for the 15-year per bond unit of Sh100.
The rate of return earned by investors does not have to match the coupons since the CBK offers discounts when a lower yielding security is reopened in a high-interest rate environment.
The bond discounts serve to lift the effective rate of return since the interest is paid on the face value of the bond and an investor will also be paid the full principal at redemption despite paying a lesser amount when buying the bond due to the discount.
