The government initiated a tap sale on a dual-tranche bond, combining a reopened 10-year bond initially issued in 2016 (FXD1/2016/010) and a new five-year bond (FXD1/2023/005) set to run until Friday this week. This tap sale aims to secure an additional Kes 20 billion, bringing the total net borrowing from bonds this month to Kes 58.6 billion. By achieving this, the government will fulfil approximately 10 percent of its full fiscal year domestic borrowing target of Kes 586.5 billion. July’s borrowing target is Kes 48.9 billion, indicating the government’s focus on front-loading domestic debt to hedge against potential interest rate increases in the future.
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During the initial sale, investors demanded an average interest rate of 16.6 percent and 17.03 percent for the 10-year and five-year tranches, respectively. However, the coupon rates settled at 15.04 percent for the 10-year bond and 16.84 percent for the five-year bond. These coupon rates are now applicable to bids in the tap sale. Analysts anticipate that the government may face pressure to accept even higher interest rates from investors in the future due to concerns about the economy’s performance, which could negatively impact tax revenue.
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The government’s increased domestic borrowing target for the current financial year to Kes 586.5 billion compared to Kes 475 billion last year means that it cannot afford to overlook any funding opportunities. Additionally, it must consider rolling over maturing debt and covering interest payments that consume a significant portion of revenue. While there are no Treasury bond maturities scheduled for this month, the government is allocating Kes 173 billion to service debt through Treasury bill maturities and interest payments on T-bills and bonds. By frontloading its borrowing this year, the government aims to mitigate potential difficulties should market conditions deteriorate in the coming days.
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