The 91-day Treasury bill interest rate has risen above the eight percent level for the first time in eight months as investors continue to put pressure on the Central Bank of Kenya (CBK) to increase rates amid higher inflation.
The three-month T-bill settled at 8.03 percent last week, up from 7.77 percent, the highest it has reached since August 28, 2025. The 182-day paper also jumped above eight percent for the first time since September 22, 2025, settling at 8.21 percent from 7.88 percent previously.
The weekly auction on Thursday was carried out against the background of inflation jumping at the fastest pace in seven years to 5.6 percent in April, from 4.4 percent in March.
This sharp increase in inflation was attributed to higher energy prices due to the US/Israel-Iran conflict, with petrol and diesel prices rising by 10.9 percent and 17.9 percent respectively in the April 14 price review.
Core inflation also rose to 2.8 percent from 2.1 percent in March, indicating that higher fuel and transport prices have started passing through to the wider economy.
Interest rates in the economy normally rise in tandem with inflation as investors seek higher returns to compensate for the erosion in the real value of the shilling.
Higher inflation also puts pressure on the CBK to raise its own base rate to reduce demand for goods and services that pushes prices higher.
According to analysts, the market has taken cue from potential inflationary pressure due to the war and is now adjusting its rate expectations upwards.
“As expected, interest rates trended higher as inflation expectations continue to rise. The magnitude of further increases will be dependent on the April inflation reading, available liquidity and government borrowing appetite,” analysts at NCBA Investment Bank said in a fixed income note.
Similar to the T-bills market, the Treasury bonds segment is also seeing increased pressure on the CBK to raise rates to keep attracting investors.
Two weeks ago, the third switch bond sale this year, targeting Sh20 billion, was largely shunned by investors, who offered only Sh1.75 billion after refusing to shift their funds to lower-paying paper.
In that sale, the CBK asked investors to swap from 10-year paper that matures in August into a 15-year bond that comes due in 2033. The 10-year paper has been paying holders 15.04 percent in annual interest, while the 15-year pays 12.65 percent.
CBK Governor Kamau Thugge attributed the poor performance of the April 13 bond to a wait-and-see approach from investors due to geopolitical uncertainty around the Iran war.
Market test
The CBK has now returned to test the market with a new switch bond targeting Sh10 billion.
Unlike the April issuance, this one will see investors get the chance to move from a 10-year bond that pays annual interest of 12.96 percent to a 20-year paper that has a rate of 13.44 percent.
It has also reopened three bonds for the May 2026 monthly sale, targeting Sh80 billion from a pair of 20-year papers first issued in 2012 and 2019 at annual interest rates of 12 percent and 12.87 percent respectively, and a 25-year bond from 2021 that pays a rate of 13.92 percent.
The reopening comes against the backdrop of total revenue collection having stood at Sh2.04 trillion in the first three quarters of the current financial year, falling behind the prescribed target by Sh84 billion.
The revenue shortfall now leaves the government grappling with elevated funding pressures, with Supplementary Budget I having increased the domestic borrowing target by 57.3 percent to Sh998.6 billion.
However, Dr Thugge has sought to allay fears that the higher borrowing target will push interest rates upwards, saying the CBK has already borrowed a net of Sh850 billion domestically, meaning only about Sh150 billion is pending to hit the new target.
“I believe with that, we can meet that borrowing target without adding a lot of pressure on interest rates,” Dr Thugge told the Business Daily in an interview last week.
Earlier in the year, the CBK had frontloaded on the domestic debt, taking advantage of higher investor demand for government securities and a liquid money market.
