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Fresh standoff as investors, CBK split on returns in latest bond sale
The reopened 30-year bond was undersubscribed with bids worth Sh8.07 billion, signalling that investors were largely unwilling to lend to the government at its coupon (interest) rate of 12 percent.
A fresh standoff between investors and the Central Bank of Kenya (CBK) over interest rates rocked Wednesday’s first auction of the three-tranche September bond issuance, where just Sh2.39 billion was raised out of a targeted Sh20 billion.
The reopened 30-year bond was undersubscribed with bids worth Sh8.07 billion, signalling that investors were largely unwilling to lend to the government at its coupon (interest) rate of 12 percent, which works out to a net return of 10.8 percent after a withholding tax charge of 10 percent on interest.
Buyers demanded a 14.37 percent yield on the bond, but the CBK settled for 13.96 percent on accepted offers. To cover the difference between the yield and coupon, the CBK discounted the price on accepted bids by Sh12.33 per bond unit of Sh100.
In the Sh60 billion September issuance, the government has reopened three bonds—the 30-year bond first sold in 2011, a 25-year bond whose initial sale was in 2022 at a coupon of 14.19 percent, and a 20-year paper first issued in 2020 at 13.2 percent.
The other two bonds will be auctioned on September 17, with a combined target of Sh40 billion.
Analysts had projected a subscription level of about 80 percent on the 30-year tranche — which is also dubbed a Savings and Development Bond (SDB)— but given the more attractive interest rates on the other two bonds, investor appetite was relatively low on the paper.
“Contrary to our expectations of a subscription rate of 70–90 percent, the issue was significantly undersubscribed on account of this being the second reopening of the bond in 2025,” said analysts at Sterling Capital in a note on the bond sale.
“While the government’s fiscal financing needs prompt investors to bid aggressively in such debt auctions, the downward trend in the Central Bank Rate appears to be more impactful in deciding the direction interest rates take.”
The CBK was hoping to capitalise on the ample liquidity in the money market to maximise demand for the first tranche of the sale, similar to the heavily oversubscribed August infrastructure bond (IFB) sale, which raised a total of Sh274.8 billion from primary and tap sales, which targeted Sh140 billion.
This IFB comprised a pair of reopened 14- and 19-year papers first sold in January 2018 and February 2022, respectively, and which came with tax-free coupons of 12.5 percent and 12.96 percent.
This means that for a similar duration to the 30-year bond, the two IFBs pay between 1.7 and 2.2 percentage points more in interest on net terms than the reopened SDB.
Investors are also keenly aware of the government’s tight fiscal headroom, despite its efforts to front-load on its domestic borrowing target, hence the reluctance to yield ground in the rates standoff.
By the end of August, the Treasury had borrowed a net of Sh260 billion, which is equivalent to 41 percent of the full-year total target of Sh635.5 billion.
However, there has been a cycle of revisions of borrowing targets through supplementary budgets in recent years due to sub-par revenue collection and increases in expenditure.
In the 2024/25 fiscal year, the budget statement had set the deficit at Sh597 billion, which was to be financed through domestic borrowing of Sh263.2 billion and external funding worth Sh333.8 billion.
Three revisions through supplementary budgets followed, eventually settling at a fiscal deficit of Sh997.5 billion in the Supplementary III Budget of June 2025, with net domestic borrowing set at Sh815.6 billion—three times the original projection.
