The 20-year bond pays annual interest of 13.2 percent, but investors asked for a yield of 14.1 percent on the paper in the sale. On the 25-year bond, they demanded a return of 15.1 percent, against its actual interest rate of 13.92 percent.

Reopened bonds normally come with an existing coupon or actual interest rate that was set when the bonds were floated for the first time in the market.

But when investors consider this return to be lower than the level at which they are willing to lend to the government, they quote a higher rate on their bids, which results in the State offering them a discount on the price of the bonds to compensate for the difference.

Ideally, a unit of a bond is priced at Sh100, with investors getting a return from the paper’s fixed interest rate. However, when a reopened bond pays a lower return compared to what the market is demanding, investors are given a discount on the Sh100 in order to entice them to lend to the government. The latest sale was done amid rising interest rates as investors sought cover against higher inflation that has resulted from the Middle East strife.

On the 20-year paper, offers stood at Sh22.68 billion, with the CBK taking up Sh19.56 billion at an average yield of 13.98 percent. The discount on the bond to compensate investors for the gap between its yield and coupon was Sh4.53 per bond unit of Sh100, exclusive of accrued interest of Sh3.55 per unit.

The 25-year bond attracted bids worth Sh54.95 billion, out of which Sh23.01 was taken up by the CBK, at a yield of 14.86 percent, and a price discount of Sh6 per unit of Sh100, less accrued interest of Sh1.87 per unit. The demand for higher returns came even as the CBK sounded an optimistic signal on inflation in its monetary policy committee meeting last week.

With inflation rising to 6.7 percent in May from 4.4 percent in March on costly fuel, some analysts had anticipated that the CBK would announce a rate hike in the MPC meeting.

The CBK, however, held the rate unchanged at 8.75 percent for the second straight time, waiting to see whether the talks between the US and Iran would yield a lasting peace deal and trigger a fall in energy prices.

When inflation goes up, central banks tend to raise rates in order to reduce the supply of money in the economy and tame demand and a rise in prices of goods and services.

These rate hike measures are, however, more effective in cases of demand-driven inflation where higher prices are caused by too much money chasing few goods.

In the current situation, inflation is being driven by costlier fuel and imported goods due to the Iran war; a rate hike would not necessarily yield lower prices in the economy.