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CBK takes Sh71bn from oversubscribed June bond
The CBK’s decision to take up an amount higher than the targeted Sh50 billion also pointed to the expected increase in domestic borrowing target for the current fiscal year.
Investors offered the government Sh101.36 billion in the latest Treasury bond sale as they rushed to lock in returns of between 12 and 13 percent before an expected decline in interest rates following the recent cut in the central bank policy rate.
The government was in the market for Sh50 billion via a pair of reopened 15 and 30-year papers, but ended up netting Sh71.6 billion from the oversubscribed sale, having rejected Sh29.7 billion from investors.
The Sh101.36 billion worth of bids also represents one of the highest amounts offered for a single bond outside of infrastructure bonds, which usually attract oversized investor interest due to attractive tax-free returns.
In the sale, the 15-year paper, which was first sold in 2020, attracted the bulk of investor bids at Sh84.53 billion, with the Central Bank of Kenya (CBK) accepting Sh57.87 billion.
The 30-year bond, which was dubbed a Savings Development Bond (SDB) when it was first floated in 2011, raised bids of Sh16.62 billion, and an accepted amount of Sh13.77 billion.
“The 15-year received the bulk of subscriptions given its shorter tenure (9.7 years to maturity) and relatively attractive coupon rate (12.76 percent) in the current interest rate environment,” said analysts at Sterling Capital in a note on the bond.
“Notably, investors bid quite aggressively on both bonds…we believe that the government’s fiscal position at the tail end of the 2024/25 fiscal year acted as an incentive for investors to bid aggressively.”
The 15-year paper carries a coupon (actual payable interest rate) of 12.76 percent, but investors demanded a return (or yield) of 13.6 percent, with the CBK eventually settling at 13.46 percent. This resulted in a price discount where buyers paid Sh96.08 per bond unit of Sh100.
The SDB has a coupon of 12 percent, with the CBK settling for a yield of 13.99 percent after investors asked for a return of 14.18 percent.
When investors demand a higher return compared to a bond’s fixed coupon rate, the CBK has the option of accommodating them by offering a discount on the price they pay for their bonds.
This price discount translates to a higher implied yield on the bond. Investors are, however, paid interest at the coupon rate, and upon maturity of the bond, they are given back the face value of their paper.
The CBK’s decision to take up an amount higher than the targeted Sh50 billion also pointed to the expected increase in domestic borrowing target for the current fiscal year, to be effected via the third supplementary budget which was tabled in Parliament on Thursday.
In the Budget Statement last week, Treasury CS John Mbadi put the budget deficit at Sh923 billion, funded by Sh635.5 billion in net domestic borrowing and Sh287.5 billion in foreign loans.
The second supplementary budget of March 2025 had a deficit of Sh887.2 billion, which is being funded by domestic borrowing of Sh605.7 billion and external borrowing of Sh281.5 billion. These funding targets remain in place until the third supplementary budget is passed by parliament and signed into law.
