The Central Bank of Kenya (CBK) has raised an additional Sh29.2 billion from the tap sale of June bonds as it races to close out domestic borrowing programme for the 2025/26 fiscal year amid higher resource requirements.
The government's fiscal agent, which has already conducted two bond auctions this month, has again offered the 20- and 25-year papers to investors from Tuesday to Thursday or upon attainment of the Sh20 billion target.
Investors showed a strong interest in the tap sale, placing bids of Sh31 billion that saw the sale closed on the first day as the CBK accepted Sh29.2 billion.
Investors in the two papers will pay a discount of Sh99.2733 and Sh96.1351 respectively for the two papers which have coupons or fixed interest rates of 13.2 percent and 13.924 percent.
The price of the two papers has fallen below the par value of Sh100 as interest rates on the primary market edge higher, indicating that investors are unwilling to pay a premium for re-opened papers on the expectation that new issuances would offer relatively higher returns.
Bond prices and yields (the interest rates) have an inverse relationship where the cost of purchasing a bond edge higher when yields are headed lower.
At their earlier re-opening this month, the two papers surprised by registering a performance rate of 129.38 percent with investor bids reaching Sh77.6 billion against a target of Sh60 billion.
Investor interest was concentrated on the longer dated 25-year paper, which has 20 years to maturity, with bids totaling to Sh54.9 billion against Sh22.6 billion for the shorter dated bond with 11.8 years to maturity.
CBK accepted just Sh42.5 billion from the auction as it rejected aggressive investor bids, leaving Sh35 billion on the table which could now be mopped up in this week’s cash call-the tap sale.
Analysts had pre-empted multiple bond sales this month as the Treasury races to conclude the domestic borrowing program for the fiscal year amid increased spending needs mirrored by the first and second supplementary budget estimates.
“We did expect a second issue in June given the huge budget financing gap with one month remaining to close the FY2025/26 financial year,” analysts at Sterling Capital, a local investment bank said in a previous fixed income note.
“The huge budget financing pressure follows the downward revision of tax revenues and upward revision of both domestic and external borrowing targets in the March 2025/26 supplementary budget.”
Actual receipts from gross domestic borrowing through the end of May 2026 stood at Sh1.179 trillion, leaving a deficit of about Sh360 billion to reach the Sh1.539 trillion revised estimates for the fiscal year as per National Treasury data. The target comprises Sh994.8 billion in net domestic borrowing and Sh544.2 billion in internal debt redemptions or rollovers.
CBK is expected to remain under pressure as the domestic borrowing target remains elevated over the medium term. This is as the National Treasury backs the local credit markets to plug in the largest portion of the budget deficit.
Net domestic borrowing for the financial year starting July 1 is estimated at 995.7 billion before falling to Sh545.9 billion in 2027/28 fiscal year.
The next domestic borrowing programme also starts against rising interest rates as investors seek cushioning from higher inflation. The pressure has been underlined by a rise in Treasury bill rates with the return on the longest dated 364-day Treasury bill set to top nine percent in the near-term.
CBK however held its benchmark rate unchanged earlier this month at 8.75 percent, noting that the higher inflation rate is likely transitory as negotiations on the US-Israel war on Iran inch closer to a deal.
The apex bank has deemed the rise in the short-term interest rates as a market correction.
