The expected trend on yields for government papers is anticipated to see a modest increase before stabilizing in the remaining months of the fiscal year 2023/24. This is primarily due to the recent Eurobond buyback, which retired 72.0% of the 10-year issue due in June 2024, thereby reducing the credit risk associated with the country for international investors.
Yields on all Kenyan Eurobonds eased over the past week, with the June 2024 maturity ending the week at 9.4%, down from 10.3% recorded the previous week. Similarly, yields on government papers have seen less aggressive increases, with the 91-day paper rising by 5.0 bps in the past week and 3.6 bps in the current week, compared to an average weekly increase of 8.4 bps in 2024. Yields on the newly issued IFB1/2024/8.5 increased by 52.8 bps, compared to a 209.6 bps increase recorded in the previous IFB1/2023/6.5.
However, the government is falling behind its revenue target, having achieved only 48.9% of the FY’2023/24 revenue target, with tax revenue reaching only 48.7% of the revised target of Kshs 2.5 trillion. Consequently, the government is expected to continue borrowing in the domestic market to make up for the revenue shortfall and to pay upcoming maturities, which will likely keep yields elevated in the short term.
On government expenditure, only 42.3% of the revised estimates of Kshs 4.3 trillion have been spent, and 72.4% of the prorated estimates, which may stimulate a decrease in interest rates due to reduced expenditure. However, increased government spending is expected in the last months of FY’2023/24 due to book reconciliations.
Regarding government maturities, pending maturities for FY’2023/24 amount to Kshs 464.5 billion, with Kshs 405.7 billion in T-Bills and Kshs 58.7 billion in T-Bonds. The government has already paid Kshs 1,140.7 billion in domestic maturities in the first seven months of FY’2023/24. Additionally, the government needs to borrow Kshs 141.8 billion monthly to meet its net domestic borrowing target, compared to Kshs 179.8 billion of monthly borrowing target in December 2023, indicating reducing borrowing pressures.
The reduction in domestic debt holdings by banking institutions to 45.8% in February 2024 from 50.2% in December 2021, along with increased credit risk surrounding the June 2024 Eurobond maturity, may lead to banks re-entering the market to enhance their asset quality. This could promote yield stability in the medium term.
With the Central Bank Rate (CBR) remaining high at 13.0%, yields on government papers are expected to stay elevated in the remaining months of FY’2023/24. The Central Bank of Kenya (CBK) has emphasized the need to curb inflation, which registered 6.9% in January, as well as the need to stabilize the exchange rate of the Shilling.
Looking ahead, the government is expected to start issuing medium- to long-term dated papers to reduce the proportion of Treasury bills in domestic debt, thereby spreading the government debt over a longer period. Additionally, the 2024 Medium-Term Debt Management Strategy (MDTS) proposes to adjust the ratio of domestic borrowing to external borrowing to 45:55 in FY’2024/25, which may result in a decline in yields on government securities.
