The National Treasury of Kenya has for the third month in a row opted to raise money through the re-opening (known as “tapping”) of a bond as it strives to hold interest rates steady in a tough economic environment that has seen foreign investors shift to the dollar-denominated Eurobond.
The Treasury, aware of the environment, has opted to extend the sale period to a week, breaking the previous trend of having a two-day sale window. It will be hoping to raise Ksh16.5 billion ($159.1m) through the the five-year bond, which offers a 12.5 per cent yield.
“Bids shall be priced at the weighted average rate of the accepted bids for the bond auction dated October 23, 2017 and adjusted for accrued interest,” said the Central Bank of Kenya in its offer.
Foreign investors have however been cautious about buying local Treasury bills and bonds at a time when the shilling has taken a considerably beating which would result in hurting them when they opt to withdraw their funds.
They have opted to invest their money in the Eurobond, which has seen the yield of the five-year bond fall to four per cent, indicating that investors are betting on the country remaining stable and an attractive investment destination despite the political anxiety. The 10-year bond has dropped 6.3 per cent.
Kenya issued the bond in 2014 at a coupon rate of 6.785 per cent for the 10-year and 5.875 per cent for the five-year tranche.
“Foreign investors currently do not want to hold local bonds because they expect the currency to weaken but don’t want to run away from the country so the Eurobond yield has been going down as demand goes up,” said Alex Muiruri, the head of fixed income at Kestrel Capital.
Global rating agency Moody’s has placed its current B1 rating of Kenya on review for a downgrade, citing political uncertainty, growing public debt and inadequate revenues to rein in the budget deficit. If the downgrade occurs, Eurobonds will trade at higher yields as investors price in the risk.
Notably, the bond sales have proven popular with full uptake driven largely by banks which have excess liquidity. In August, the Treasury raised Ksh25 billion ($241m) by tapping a 10-year bond and a further Ksh13 billion ($125.4m) in September.
“The bonds secondary market has witnessed suppressed volumes with investors banking on primary auctions they have been the result of increased tap-sales by CBK on on-the-run issues,” said Sterling Capital.
The Treasury has been using tap sales in a bid to keep a lid on interest rates in order to avoid destabilising a market operating under interest rate regulations.
“The government believes the yield curve should remain static with the purpose of making people disciplined and not to bid higher, which is in line with interest rate cap environment,” said Mr Muiruri.
Commercial banks are currently struggling with excess liquidity occasioned by a drop in credit growth attributed to interest rate caps making it unattractive to lend to the private sector, especially those enterprises perceived as risky.
Banks have preferred to put their money in the bonds, whose yields average 12 per cent — close to the current cap of 14 per cent. The bonds carry a lower risk premium, unlike lending to the private sector, which is expected to have adverse effects when a new accounting standard, IFRS 9, takes effect next January.
Analysts queried how long the government was willing to continue with this strategy ,given that it is crowding out the private sector from access to credit.