Central Bank of Kenya (CBK) rejects Sh22 billion as bond investors seek higher rates

The Central Bank of Kenya (CBK) has rejected bids worth Sh22.5 billion in the March Treasury bond sale after investors demanded higher rates amid concerns over inflation and a weakening shilling due to rising global commodity prices.

Three bonds –a five-year, 15-year and 25-year paper— sought to raise a total of Sh50 billion but attracted bids of Sh40.9 billion. The government’s fiscal agent took only Sh18.45 billion, rejecting most of the bids including those that sought interest rates above 14%.

The 25-year tranche was the most popular among investors, attracting bids of Sh22.6 billion, out of which only Sh3.9 billion was taken up by CBK.

The average rate on bids stood at 14.23% on the 25-year paper, but CBK’s accepted bids coupon was 13.97%.

The 15-year paper raised bids worth Sh9.14 billion at an average rate of 13.81%, with CBK taking up Sh6.2 billion with a coupon of 12.75%.

The five-year’s bids stood at Sh9.2 billion, at 12.05% on average, where Sh8.3 billion was accepted at a rate of 11.99%.

The sub-par performance in bidding was also driven by tighter market liquidity, with the sale starting just a week after the closure of the massively oversubscribed February infrastructure bond issue which raised Sh98.6 billion against a target of Sh75 billion.

The underperformance of the latest bond auction was contrary to expectations among investment banks, which had projected a slight oversubscription on account of the heightened risk aversion in other investment classes, a scenario that normally herds investors to bonds.

The higher rate demands were however likely to work against investors, given that the government is under no pressure to borrow heavily from the domestic market in the remainder of this fiscal year.