An escalating discord between the Central Bank of Kenya (CBK) and investors regarding interest rates has been observed following an underwhelming outcome from the sale of the October Treasury bond, which garnered merely below 20% of the aimed Sh35 billion. 

The recent statistics highlight that the government could only secure Sh6.3 billion against its Sh35 billion goal, an indicator that investors are chasing more lucrative returns, signaling the availability of preferable alternatives. The demanded rates from investors have now peaked to an unprecedented level in more than a decade and a half, outdoing previous maximums experienced in late 2015 and early 2016, reaching 16%. 

According to CBK data, investors, influenced by the government’s sizable fiscal deficit, sought a mean of 18.46% on the re-issued five-year bond and 17.96% on the re-issued two-year bond during the dual-tranche sale. They proposed a total of Sh12.3 billion in the sale, with only half being accepted at average yields of 17.99% and 17.74% for the five-year and two-year tranches respectively. 

Market analysts noted that even though only short-term bonds have been offered by the government in the preceding months, investors have preferred to allocate their capital in the 91-day Treasury bills, thereby circumventing potential losses on bonds should yields continue their upward trend. 

Investors, which include banks that retain bonds for sale, observe an increase in secondary market yields, which in turn, equates to diminished prices for their securities. 

There’s also a strategic pause by investors, anticipating a probable issue of a tax-exempt infrastructure bond in the forthcoming period. 

Analysts from Sterling Capital articulated that the auction was notably under-subscribed, registering a performance rate of 35.2%. Investors are evidently hedging against duration risk amid a rising interest rate environment, with a preference for investing in T-Bills. The CBK expressed its resistance towards aggressive bids by accepting only 51.2% of the total bids across both bonds, signaling to investors that it won’t succumb to pressures to accept high-cost debt. 

Nevertheless, the monetary regulator’s ability to persistently rebuff costly bids has been challenged in the recent bond sales, highlighting a requisite to mediate between this position and achieving the government’s domestic borrowing goals.  

Analysts indicate that one of the catalysts behind the gradual increase in bond interest rates for durations between two and five years (from 14% in June to just shy of 18%) is this fiscal strain. The escalating cost of domestic debt has compelled the Treasury to modify the net borrowing target for the present fiscal year to Sh415.3 billion, down from an initial Sh586.5 billion. 

A strategy to alleviate fiscal stress has been implemented by the government through authorizing a 10% reduction of the recurrent budget across ministries and departments. 

The diminished borrowing target is contingent on a near one-third increase in tax revenue amidst economic challenges and access to enhanced external market borrowing, involving a blend of commercial and concessional loans. However, there is a looming apprehension concerning the repercussion of the soaring interest rates on the cost of private sector credit, potentially stifling economic growth by restricting businesses’ capacity to borrow for investment. 

Sterling analysts anticipate the CBK may adopt a more receptive stance towards higher investor bids in imminent debt auctions. Despite the CBK’s optimism that a reduced domestic borrowing target would subsequently lower interest rates, investors have adopted a cautious approach, postponing any rate reductions until witnessing whether the proposed heightened external borrowing becomes a reality. 

With external market conditions being challenging for sovereign borrowers due to global interest rate augmentations and amplified risk aversion, subsequent to defaults from issuers like Ghana and Zambia, and a $2 billion Eurobond maturing in June 2024, Kenya is grappling with substantial refinancing pressure in the near future.  

CBK Governor Kamau Thugge shared with Reuters during the ongoing World Bank and IMF annual meetings in Morocco that Kenya is targeting commercial loans ranging between $500 million and $1 billion from the Trade & Development Bank and the African Export-Import Bank, intended for Eurobond buyback and budgetary backing. 

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