The Central Bank of Kenya (CBK) declined significant investor bids totaling KES 37.1 billion in this week’s Treasury bond auction, signaling its intention to reduce interest rates from their peaks of up to 18%.
The auction, comprising three bonds for March, included a reopened 3-year issue that closed on March 6th. Sales for the 5-year reopened bond and the issuance of a new 10-year bond closed on March 20th. From the total offer of KES 59.7 billion in bonds, the CBK accepted only KES 22.6 billion.
The rejection of high interest rates suggests a reduced urgency for government funds, opting to await market rate cuts. Particularly, the majority of rejections occurred in the auction of the 10-year bond, where investors sought an average 17.8% interest rate, above the government’s set 16% coupon rate.
Meanwhile, the 5-year bond was more receptive, with the government accepting bids at an average of 18.4%, slightly below the asking average of 18.6%.
Analysts interpret the CBK’s decision to set the 10-year bond’s coupon at 16% as a move towards lower yields. This is supported by factors such as the successful Eurobond 2024 issuance and a strengthened shilling, reducing market risk sentiment and indicating a downward trend in yields.
The KES 23.8 billion in offers for the 10-year bond reflects market belief that rate increases have peaked, leading to acceptance of longer-duration bonds.
Earlier in the month, the CBK rejected KES 8.8 billion of the KES 43.1 billion bids for the three-year bond, with accepted offers averaging 18.4% against an asking average of 18.5%.
Governor Kamau Thugge’s recent measures aimed at curbing aggressive interest rate bids from banks have provided the CBK with room to reject expensive offers in subsequent tranches.
Previously elevated interest rates reflected investor concerns about government risk, particularly surrounding the June Eurobond, which have since been partially alleviated. Additionally, successful fundraising from the February infrastructure bond has eased pressure on the CBK to meet the KES 422.7 billion domestic borrowing target outlined in the 2024 Budget Policy Statement.
