Wealthy investors and fund managers splashed a record Sh1 trillion on seven bonds over four months, reflecting the abundance of cash in an economy that is favouring passive investments over setting up businesses.
Investor bids in auctions since July topped the Sh1 trillion mark, which was more than double the Sh480 billion sought by the Central Bank of Kenya (CBK) in the sales.
The CBK, which acts as the fiscal agent of the Treasury, accepted Sh654 billion from the investor bids, helping it reach 65.1 percent of its net domestic borrowing target for the 2026/27 fiscal cycle.
This underlines the growing flight to passive investments such as bonds and unit trusts instead of starting businesses in an environment where startups are struggling to survive.
Top buyers of bonds, including commercial banks, insurance firms and households, have continued to favour fixed income securities despite the decline in domestic interest rates.
Last week, the CBK disclosed that it had reached Sh642.5 billion in net domestic borrowing for the year starting July to October 26, a quarter short of surpassing the Sh987.4 billion target for the year to June next year.
“The domestic market continues to support the growing budgetary financing requirements,” Kamau Thugge, the CBK governor, told the National Assembly Finance and National Planning Committee on Friday.
“This is supported by effective collaboration and coordination between the National Treasury and CBK, working with market participants and stakeholders.”
The CBK has found success in lengthening the maturity of domestic debt by reopening medium to long-term bonds, supported by ample market liquidity and relatively lower interest rates.
The sale marks a continuation of the recent trend of Kenyans pouring billions of shillings into bonds and money market funds while shunning riskier ventures like starting a business, which presents an opportunity for the economy to create new jobs.
For businesses that have delayed investment decisions, the bonds market provides a platform to protect the value of idle capital at minimal risk, while also retaining value through returns that are above the average rate of inflation.
Infrastructure bonds provide an attractive option for the passive investor due to their tax exemption on interest, leading to large subscriptions whenever they are offered by the government.
The largest haul from the bonds came in August under three reopened infrastructure bonds, which raised Sh312 billion against a target of Sh150 billion.
The three tax-free bonds attracted bids worth Sh460.3 billion, achieving a performance rate of 307 percent.
All seven bond auctions over the period have been oversubscribed, underlining continued investor appetite for government paper.
The CBK further attained success in pushing out maturities of Sh49.6 billion through four switch bonds, surpassing its target of Sh45 billion after outsized subscriptions of Sh52.4 billion.
The government is expected to face manageable domestic borrowing costs going into 2027, having raised at least three quarters of its annual target in four months, even as rebounding inflation threatens the interest rates outlook.
“We expect a steady yield curve in the final quarter of the year. Domestic borrowing is ahead of the curve, with the fortnightly Treasury bond reopenings coupled with the bond switches aimed at lowering the short-term refinancing risk,” analysts at Capital A Investment Bank said in a research note.
The CBK is currently in the market seeking to raise Sh50 billion through the reopening of 15- and 30-year Treasury bonds in a sale that runs to November 4.
Additionally, the CBK is seeking to switch Sh10 billion from maturing Treasury bills to a 10-year bond which would extend the part of the paper’s maturity by three years.
Treasury bonds have remained a popular passive investment option as investors shy away from deploying cash in the real economy, which would create new businesses, increasing productivity and jobs.
The bonds made up 83.21 percent of the Sh7.88 trillion domestic debt stock as of October 23, while the shorter-dated Treasury bills were 15.53 percent of local debt.
Financial corporations, including commercial banks, pension funds and insurance companies, held the bulk of local debt at 80 percent.
The balance of domestic debt is held by other parties, including households at 6.16 percent, non-residents at 4.46 percent and non-profits at 0.91 percent.
Investors have, at the same time, packed close to Sh1 trillion through collective investment schemes like money market funds (MMFs), special funds and fixed income funds, which also make circular investments back to Treasury bills and bonds.
Commercial banks’ fixed deposits, which are also deployed in Treasury bills and bonds, held Sh3.2 trillion at the end of July.
Rebounding inflation is expected to put pressure on domestic interest rates and likely drive investors away from bonds to short-dated Treasury bills on expectations of yields increasing.
Analysts note that the rising preference for the 91-day Treasury bill, even at lower yields, shows that investors are prioritising liquidity and shorter investment commitments amid uncertainty over the inflation outlook.
“We maintain our view that the 91-day paper will remain the preferred option, given that inflation is expected to remain elevated, on account of higher energy prices, plus drought conditions that continue to threaten agricultural output and could exert further pressure on food prices,” analysts at AXYS Investment Bank said in a research note.
