The Central Bank of Kenya in Nairobi. PHOTO | FILE | NMG
The Central Bank of Kenya (CBK) turned down Sh37.1 billion worth of investor bids in this week’s Treasury bond auction, sending its firmest signal to the market that it intends to bring down interest rates from highs of up to 18 percent.
The March issuance that sought Sh40 billion consisted of three bonds, a reopened three-year paper whose sale closed on March 6, and a reopened five-year paper and new 10-year paper auctioned this week.
Results of the bond published by the CBK show that the total volume of bids on the five and 10-year bonds stood at Sh59.73 billion, out of which the State took up Sh22.6 billion.
The bulk of the rejections was on the 10-year bond, which saw the CBK take up Sh4.8 billion out of bids of Sh23.8 billion. On the five-year bond, the CBK took up Sh17.7 billion out of offers worth Sh35.8 billion.
The 10-year bond had a predetermined coupon of 16 percent as the CBK signalled to the market its intention to lower rates. Investors, however, sought an average of 17.75 percent, which was above the expectations of investment banks of a range between 16.2 and 16.9 percent.
On the five-year paper, the CBK was more accommodating of investors, accepting bids at an average of 18.41 percent against average asking rates of 18.59 percent.
“When the CBK predetermined the 10-year bond’s coupon at 16 percent, it was a signal that it was nudging yields lower,” said Ronnie Chokaa, a senior analyst at AIB-AXYS Africa, an investment bank.
“The cocktail of the successful issuance of Eurobond 2024 and the strengthening of the shilling has warranted an easing of risk sentiment in the market, so we expect yields to trend downwards, albeit progressively.”
According to analysts at Sterling Capital, the offers of Sh23.8 billion on the 10-year bond are indicative of the market’s acceptance that the rise in rates has peaked.
“The 10-year’s bids are reflective of the market’s assessment of yields peaking hence the willingness to accept a longer duration bond,” said Sterling in a note.
Similarly, on the three-year bond sold earlier in the month, the CBK rejected Sh8.8 billion out of the bids worth Sh43.1 billion. Accepted offers on this bond averaged 18.42 percent, versus an asking average of 18.52 percent.
The fact that the three-month paper raised 86 percent of the month’s target of Sh40 billion gave the CBK room to turn down expensive offers in the sale of the subsequent two tranches.
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 2024 Budget Policy Statement.
