Kenya extends sale of 12-year Ksh24bn bond

The Central Bank of Kenya has extended the sale of a 12-year infrastructure bond to March 2nd in an attempt to raise 24 billion Kenyan shillings. This extension decision follows the initial bond sale which only fetched 6 billion shillings on February 22nd. The move to extend the sale period is attributed to the unmet high yield expectations from investors. The cancellation of the auctions for a 364-day Treasury bill and a 15-year bond, meant for budgetary support, further underscores the current challenging environment for domestic borrowing in Kenya. Kenneth Minjia, the Head of Securities at Genghis Capital, shed light on the market dynamics during a CNBC Africa interview. While the bond subscription initially performed well, with bids reaching around 32 billion shillings, significant amounts were rejected by the central bank due to unfavorable rates for the National Treasury. The central bank is now returning to the market for a reissue at an accepted average rate of 13.5%. However, investor appetite remains low at this rate, as many perceive yields below 14% as unfavorable. The prevailing market sentiment indicates a cautious approach from investors who are anticipating a potential uptick in interest rates driven by inflationary pressures and external factors affecting the local currency. The uncertainty surrounding future rate movements has led investors to adopt a risk-averse strategy, favoring shorter durations or demanding higher yields when considering longer-term investments. The government's plans to raise 1.5 billion dollars through external borrowing have seen some progress, with 250 million dollars secured from a bank consortium. Despite these external efforts, the success of domestic borrowing remains uncertain, with challenges anticipated in meeting the deficit within the remaining four months of the fiscal year. The expectation that rates will not surpass the upper limit set by the interest rate caps poses a significant obstacle to achieving the desired borrowing targets domestically. The upcoming Monetary Policy Committee meeting in March could potentially influence market sentiments if adjustments are made to the Central Bank Rate, thereby altering the prevailing interest rate regime. The reluctance of investors to subscribe to government bonds at current rates below 14% reflects a broader apprehension regarding future rate trends and their potential impact on investment returns. The liquidity surplus in the market, combined with the Central Bank's open market operations and the repo rate averaging around 10%, has led to limited investment alternatives for banks. The preference for short-term government securities over longer-term bonds is driven by the relative yield differentials and the perceived risk exposure in a rising rate environment. Banks, as significant holders of government securities, play a pivotal role in influencing market dynamics, with many opting for trading activities over long-term investment commitments. The persisting low overnight trade rates indicate a cautious approach from banks, emphasizing the importance of market liquidity management amidst evolving economic conditions. The challenges faced by the government in its domestic borrowing efforts underscore the complex interplay of market forces, regulatory constraints, and investor expectations. As Kenya navigates through the current economic landscape, balancing the need for fiscal sustainability with market realities remains a critical priority.