(Nairobi) – The Kenyan government has successfully raised KSh 25.7 billion from its first bond sale of November, surpassing the target of KSh 25 billion. The auction, which closed on Wednesday, included bonds issued in previous years: a 15-year bond from April 2022, a 10-year bond from February 2023, and another 10-year bond first floated in March 2023. The auction attracted a total of KSh 33 billion in bids, indicating strong investor interest despite ongoing efforts by the Central Bank of Kenya (CBK) to limit borrowing costs.
Investors have been eager to lock in higher-yielding bonds, as interest rates continue to decline. The CBK, however, has been selective in approving bids, aiming to keep borrowing costs manageable while meeting the government’s large funding needs. The low acceptance rate of 60.7% indicates the CBK’s cautious stance, rejecting some of the higher-priced bids that would have led to more expensive debt for the government.
The coupon rates on the bonds issued were 13.94% for the 15-year 2022 bond, 14.15% for the 10-year 2023 bond, and 16% for the 10-year 2024 bond. However, the bids reflected higher yield expectations from investors, with the average return for the 2023 bond coming in at 15.97%, while investors demanded an average return of 16.38% on the 2022 15-year bond. To accommodate these expectations, the CBK offered price discounts, effectively increasing the rate of return despite the lower coupon rate.
Investors often accept bonds at a discount to the face value, which helps raise the effective rate of return. This approach allows the CBK to offer lower-yielding securities while maintaining market interest. The bond prices were discounted by KSh 4.73 per unit for the 10-year bond and KSh 11.63 per unit for the 15-year bond, providing an effective return that compensates investors for the reduced upfront cost.
The government plans to close the sale of the remaining bond paper, which targets KSh 20 billion, next week. Despite the challenges of controlling borrowing costs, the successful auction signals investor confidence in the government’s bonds amid a declining interest rate environment.