The Central Bank of Kenya (CBK) is seeking to raise Sh80 billion from the sale of four bonds in July including a partial switch of a security maturing on November 9, 2026.
The government’s fiscal agent intends to collect Sh70 billion from the reopened sale of 10, 20 and 30-year bonds.
The 10-year paper, which has 5.8 years left to maturity, has a coupon or fixed interest rate of 13.49 percent.
The 20-year security has a 13.444 percent coupon and has 15.2 years to redemption. The 30-year bond, first sold in April this year, pays an annual interest at a fixed rate of 12.5 percent.
The CBK has been issuing discounts to investors in long-term bonds in a move that effectively raises their returns to reflect the jump in interest rates compared to when the securities were first auctioned.
The discounts are the result of investors bidding for higher returns in the wake of rising inflation following the rally in the price of commodities led by petroleum products.
When the CBK gives a discount, an investor pays less than the bond’s face (actual) value.
The interest paid is however calculated on the full value of the bond, resulting in the higher total return compared to a situation where an investor pays the full price.
When the 30-year paper was first sold, for instance, investors paid Sh91.0421 per Sh100, giving them a weighted average rate of 13.7554 percent against the coupon rate of 12.5 percent.
The sale of the three bonds closes on July 8. The CBK is also asking investors to switch at least Sh10 billion of their holdings in a five-year bond into a 20-year security.
The five-year paper, which has an outstanding value of Sh47.6 billion, is set to mature on November 9, 2026.
The paper has a coupon of 11.277 percent, making it more attractive to switch to the 20-year security which has a fixed interest rate of 12 percent.
The 20-year paper has 6.3 years left to maturity. The switch option will remain open until July 13, 2026.
The increasing use of switch auctions is aimed at reducing refinancing risk for the government, especially when a large amount is due for redemption in a rising interest rate environment.
Interest rates have crept up in the wake of the US and Israel war on Iran which has driven up inflation in most parts of the world, primarily through higher fuel prices and disruption of supply chains.
An end to the war is expected to ease the inflation pressure, ultimately lowering interest rates and borrowing costs for governments and other borrowers.
“Concerns about inflation eased during the week due to the decline in global oil prices, as the United States and Iran reached a cease fire agreement, including re-opening of the Strait of Hormuz,” the CBK said in its latest weekly bulletin.
