Investors are likely to demand a premium above the 16 percent return the government is offering on a 10-year bond, testing the
resolve of the Central Bank of Kenya (CBK) and the National Treasury to lower the interest cost on domestic debt.This bond, alongside two reopened three- and five-year papers, make up the March 2024 issuance whose target is to raise a combined Sh40 billion. The three-year bond sale concluded last week, raising Sh34.3 billion, while the five and 10 year options are on sale until March 20.
The CBK took the rare step of setting the 10-year bond’s coupon before the sale, departing from the routine of letting the market decide the return.
The move is seen by analysts as a signal to the market that it intends to start lowering rates now that the government’s borrowing pressure has abated.
Two investment banks, however, expect that average bidding levels of the bond will sit in the range of 16.28 to 16.9 percent, which if accepted would force the CBK to offer a discount on price because they are above the bond’s stated coupon rate.
Read: Investors inject Sh33bn into T-bills, snub Sh30bn bond
“From our analysis of the prevailing macroeconomic environment, market liquidity levels, upcoming coupon payments and investor bids at past auctions, we recommend bid levels of 16.4-16.9 percent for FXD1/2024/10 yield.”
Analysts at AIB-AXYS Africa see competitive bids coming at an average of 16.28 percent to 16.48 percent, while also expecting the bulk of bids to go towards the shorter-dated papers.
The CBK is, however, unlikely to be under pressure to accept bids above the coupon rate, considering that the March issuance has raised 86 percent of its target courtesy of the three-year tranche.
The raising of Sh240.9 billion from the February infrastructure bond has also lowered pressure on CBK to meet the domestic borrowing target, giving it the leeway to reject aggressive investor bids.
The net domestic borrowing target is projected at Sh422.7 billion, as per the recently released Budget Policy Statement.
Instead, the 10-year bond will signal a return to longer issues after a series of short dated bonds whose coupon has gone up to 18 percent.
Read: February bond underperforms, investors go for T-bills
Issuing long-term bonds on the backdrop of higher interest rates would have exposed the government to the elevated costs of domestic debt over the longer term.
The CBK has otherwise preferred auctioning short-dated securities, mostly ranging between three and five years even as this results in a reduction in the average time to maturity for government debt.
→ cmwaniki@ke.nationmedia.com
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