Treasury misses target again in latest bond sale

Capital Markets

Treasury misses target again in latest bond sale


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The National Treasury building in Nairobi on Sunday, May 24, 2020. PHOTO | DENNIS ONSONGO | NMG

The Treasury’s borrowing struggles in the domestic market continued in this month’s bond sale, which fell Sh11 billion short of target as the Central Bank of Kenya continued to spurn expensive bids from investors.

Banks have also been wary of taking on new bonds due to valuation losses on their holdings when secondary market yields are going up. Bond prices or valuations fall when yields rise.

This month’s bond sale, a two-tranche reopening of 10 and 15-year papers first sold earlier this year, had sought to raise Sh50 billion, but only raised Sh39 billion.

Investors offered the government Sh46.1 billion, meaning that CBK left Sh7.1 billion on the table after rejecting expensive bids.

This latest underperformance of a bond offer means that the government remains below target in its borrowing programme for the current fiscal year, at a time when securing money from the international market also remains a struggle due to high rate demands by external lenders.

In the first two months of the fiscal year (July and August), the government issued three bonds seeking a total of Sh110 billion, but only managed to raise Sh54.2 billion.

In the current fiscal year, the government is targeting to borrow Sh578.6 billion from the domestic market, as part of financing for a Sh845 billion budget hole.

By the end of last week, the Treasury had raised 10.2 percent of this target, against a pro-rated expectation of 16 percent.

“Trading investors wish to avoid bond revaluation (mark to market losses) losses which are price declines below their purchase cost or original value resulting from rising interest rates,” said city-based investment bank Sterling Capital in a note on the bond sale results.

“Investor (also) bid aggressively beyond the 14 percent psychological level, particularly on the 15-year issue…These bids were however largely rejected by the CBK which is still keen on keeping rates below this level.”

In the September bond sale, the coupon or applicable interest rates stood at 13.49 percent for the 10-year tranche and 13.94 percent for the 15-year option.

Investors, however, sought an average of 13.9 percent for the shorter paper, and 14.1 percent for the 15-year option.

The underperformance also defied a relatively liquid money market and the easing of tensions in the economy due to the peaceful conclusion of the General Elections, which culminated with the swearing-in of Dr William Ruto as the country’s fifth President on Tuesday.

In a pre-sale note, investment bank AIB AXYS Africa had projected an oversubscription on the issuance, citing improved liquidity in the money markets and the passing of the cloud of uncertainty following the conclusion of the election petitions and subsequent swearing-in of the new President.

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