The Central Bank of Kenya (CBK) has been forced to cancel the issuance of a reopened 15-year bond, the sale of which closed on Tuesday, adding to the government’s recent struggles to raise debt financing from the domestic market.
Due to the poor performance, the Treasury may increase pressure on the Kenya Revenue Authority (KRA) to meet collection targets or increase reliance on external financing to close the budget funding gap.
This week’s sale included the reopening of a 15-year bond that was previously sold in 2019 and a three-year paper that was previously sold last year, for a total of Sh30 billion.
The three-year bond raised only Sh1.76 billion, with the underperformance and cancellation of the 15-year bond attributed to aggressive rate demands from investors during a liquidity crunch in the money market.
Earlier this month, the Treasury auctioned off the first tranche of this month’s bond issuance, a 10-year reopened paper aimed at Sh20 billion, raising only Sh3.6 billion.
It also fell short of its target with a tap sale on an infrastructure bond it first floated in March, raising Sh5.1 billion out of a Sh10 billion target.
Analysts believe that, despite the market’s tight liquidity, the most likely reason for the bond cancellation was aggressive investor bids that the government deemed unsustainable, rather than a lack of investor interest in lending.
“The cancellation of the bond is likely a result of overly aggressive bids from investors with the government striving to control the high yields,” noted a market analyst.
The three-year paper received bids totaling Sh7.3 billion at a market-weighted interest rate of 13.8 percent versus a coupon rate of 11.8 percent.
The Central Bank of Kenya provided no additional information about the cancelled 15-year tranche.
With only a little more than two months until the end of June, the low bond auction acceptance continues to put pressure on the exchequer’s domestic borrowing targets for the fiscal year 2022/23.
Investors’ expectations for higher interest rates in bond issues have kept them off the market, putting the government behind its borrowing target despite tax revenue underperformance.
Analysts anticipate that investors will attend this week’s Treasury Bills auction to maintain their preference for short-dated papers due to market uncertainty about interest rates.
Domestic borrowing stood at Sh396.3 billion in the nine months to March, according to National Treasury data, against a target of Sh886.5 billion, including rollovers.
