The National Treasury will now issue switch bonds monthly, giving holders of maturing securities a regular opportunity to reinvest their money in longer, more lucrative papers.
Previously, the government opened the swap bonds on a need basis, targeting securities whose repayment would trigger a repayment strain on the exchequer.
The Treasury’s newly published 2026/2027 Annual Borrowing Plan is making the switch or swap bonds a regular issuance targeting between Sh10 billion and Sh20 billion.
These swap bonds will be offered by the Central Bank of Kenya (CBK) alongside the usual Treasury bond sales that are primarily used to finance the budget deficit.
A switch or swap bond occurs when holders of a paper that is nearing maturity are offered the exclusive chance to move all or part of their principal directly into another longer bond.
Ordinary rollovers, on the other hand, see investors wait until they are paid back their principal before making bids in the monthly bond sales where there is no guarantee that their offers will be accepted.
For the fiscal year ended June, CBK offered four switch bonds executed between January and May 2026, which pushed forward Sh66.8 billion maturities that were due in the next two years. The year’s borrowing plan had called for six such bonds.
“The planned liability management operations on domestic debt for this financial year will be part of the borrowing strategy,” said the Treasury in the 2026/27 borrowing plan.
“This will be implemented by selecting the optimal mix of instruments to replace maturing bonds with the aim of reducing maturity pressure, smoothing the redemption profile and supporting secondary market liquidity by switching into larger liquid bonds.”
Investors participating in switch auctions are usually offered bonds that pay a higher interest rate compared to what their current papers pay to entice them to agree to the swap.
This rate incentive allows them to secure higher future interest returns, even when interest rates are trending downwards.
In July, holders of a five-year bond maturing in November 2026 moved Sh7.95 billion into a 20-year paper maturing in November 2032, effectively lengthening the debt by six years.
The five-year paper pays interest at 11.75 percent, compared to 12 percent for the 20-year option. Due to its tenor being more than five years, the 20-year bond carries a lower withholding tax on interest of 10 percent, compared to 15 percent for the five-year bond.
This month, CBK has asked holders of a 15-year paper that pays 11 percent interest maturing in September 2027 to move to a 19-year bond with a rate of 12.28 percent that matures in November 2029. The Sh15 billion offer is also targeting Treasury bill maturities that fall due on September 6, 2026.
Domestic debt maturities are normally funded by rolling over the debt via new bond issuances, and rarely through repayments from tax collections since the government is already running a budget deficit.
Refinancing the debt through ordinary bond sales can affect the government’s ability to borrow more for budgetary purposes, especially when these bonds are undersubscribed.
Swapping a bond with another therefore helps avoid the competition for funds between maturities and new borrowing.
The State also has the option of varying out a bond buyback to address near-term maturities. In a buyback, the State issues a new bond, and then uses the proceeds to make an early repayment of another paper, usually one that is nearing maturity.
In a buyback, however, holders of the bond targeted for refinancing can either choose to take their money or participate in the new bond sale if they wish to roll over their capital.
Switch bonds were only introduced into the Kenyan market recently, coinciding with the rise in government debt service costs amid higher borrowing needs to fund a widening budget deficit.
The Treasury brought its first such bond in June 2020, offering investors a six-year infrastructure paper in exchange for a maturing one-year Treasury bill. This netted Sh20.2 billion out of a target of Sh25.6 billion.
The second switch bond was sold in December 2022, seeking Sh87.8 billion via a six-year infrastructure bond, targeting holders of maturing Sh31.96 billion Treasury bills and a maturing two-year bond which had an outstanding amount of Sh55.85 billion.
In the current fiscal year, the State has a net domestic borrowing target of Sh898 billion. It also needs to raise Sh438.4 billion to repay principal domestic debt, while also spending Sh986.7 billion in domestic debt interest payments.
