Kenya: Three-year Treasury bond raises Sh33 billion

The Treasury has raised Sh33.1 billion from the sale of the three-year bond, falling below the target of Sh40 billion.

The paper was being auctioned alongside a 15-year bond which is still on sale until April 19. The longer-dated paper seeks to raise Sh30 billion.

The Central Bank of Kenya, the government’s fiscal agent, had received bids of Sh34 billion on the three-year bond and rejected Sh908 million.

Accepted bids will be paid for in full, with the security having an average interest rate of 11.76% which was set by the market.

The interest rate on the 15-year bond will likewise be determined by the market, with this being the first offer for the bonds.

This will be the only three-year bond outstanding, marking a rare issuance of a short-term treasury.

The CBK has in recent years focused on selling long-term bonds to reduce short-term refinance risk.

Refinance risk refers to a situation where a large number of securities are replaced at higher interest rates in a short period of time.

The only other short-term bond is a two-year paper which will be redeemed in January next year. Two-year bonds were common in 2014 and earlier years, enabling investors to earn fixed income without locking in their capital for long.

T-bills offer even greater liquidity but have the lowest interest rates. The increased dominance of long-term bonds is seen as a strategy to manage the public debt which has grown rapidly over the years.

The scarcity of medium-term bonds comes at a time when CBK has also reduced the auction of T-bills, reducing the pool of short-term securities which are preferred by banks for maintaining liquidity even as they generate returns.

Pension funds and life insurers, which invest over decades, have benefited from the expansion of long-term bonds. The institutional investors have increased their allocation to fixed income instruments which have often generated the highest returns among mainstream asset classes on an annual basis.