Rising Eurobond yields signal higher cost of borrowing

The risk assigned to Kenya’s sovereign bonds by international investors has gone up in the last six months, meaning that the country stands to pay higher interest if it floats a new Eurobond under current market conditions.

Kenya has an outstanding portfolio of four Eurobonds worth a cumulative $6.1 billion (Sh693 billion), which are traded on the Irish and London stock markets.

Their yields on the bonds, which have a maturity profile of between 2 and 26 years, have gone up by an average of 1.22 percentage points since June 2021. The highest rise has been on the seven-year paper maturing in 2027, from 4.58 percent to 6.23 percent.

Bond yields in the secondary market rise when risk sentiment goes up, and are matched with a fall in the price of the paper. This means that investors are willing to offer their bonds at a discount to secure buyers.

On the other hand, yields fall when prices go up, showing that investors are demanding a premium to let go of their bonds due to lower risk sentiment—which means new issuances of similar tenor would pay less in interest.

The main concern for investors looking at Kenya presently is political noise ahead of the general elections in seven months’ time.

Although the economy is recovering from the Covid-19 hit, previous political contests have tended to disrupt business and pause investments, hence the higher risk assessment by international investors.

Kenya is planning to borrow $2.19 billion (Sh249 billion) through two commercial loans before the end of the current fiscal year as part of budget deficit financing measures.

The Treasury had indicated to the IMF that it intended to float part of this issuance by the end of last December but did not do so, indicating that market conditions might have been unfavourable for a new bond.

Last week, Treasury officials stated that they will retain Citi Bank and JP Morgan to arrange the Sh249 billion bond issuance.

The Treasury added that the two lenders, who also helped Kenya raise $1 billion (Sh113.5 billion) in June last year, will set the timing for the issue “depending on the market conditions.”