The Central Bank of Kenya and housing financier Shelter Afrique are to test the region’s debt market this month with two bond issues, which are seeking a combined Ksh23.5 billion ($268.4 million).

The banking regulator is seeking Ksh20 billion ($228.4 million) through an infrastructure bond — the first to be floated in two years — while Shelter Afrique is looking for Ksh3.5 billion ($39.9 million) through fixed rate bonds.

The two institutions are tapping the bond market at a time when interest rates, as indicated by the movement of Treasury bill yields, seem to be pulling in different directions, with some trending up and others down.

But it is expected that the two bond issues will be fully subscribed, especially because of the returns they are offering investors and the large amount of money in the market that is looking for viable investment opportunities.

ALSO READ: Kenya's bond auction attracts $365.4m

“There is sufficient liquidity in the market and the bonds will find takers. There may be some investment options in the equities market, but when there are concerns about equities, fixed income is usually the alternative,” said Eric Musau, research analyst at Standard Investment Bank.

The 12-year government infrastructure bond is paying interest at an annual rate of 11 per cent every six months, but its coupon payments and discount will be tax-free.

Its coupon rate is however lower than the 12 per cent annual rate being paid by the last infrastructure bond issued in 2011, but higher than the 6 per cent annual rate that is paid by the one issued in 2010.

Shelter Afrique’s five-year bond has no discount, but is paying interest at an annual rate of 12.75 per cent every six months, similar to the three-year bonds worth $5.8 million issued in December last year.

CBK last sold an infrastructure bond in October 2011, when it issued Ksh14.13 billion ($140.71 million) in debt to fund various projects.

Now, CBK is seeking Ksh10.1136 billion ($115.5 million) to fund water, sewerage and irrigation projects, Ksh14.2784 billion ($163.09 million) to develop transport infrastructure and Ksh11.6334 billion ($132.8 million) for energy projects.

Yields for 91-day and 364-day Treasury bills have been trending down for the past three auctions while those for 182-day Treasury bills have been moving in both directions.

The issues are coming a few weeks after Jamii Bora Bank, one of the smallest in the country, announced that its five-year privately placed Ksh1 billion ($11.46 million) bond that is paying interest at an annual rate of 13.3 per cent every six months, had been oversubscribed by two per cent.

Timothy Kabiru, chief commercial officer Jamii Bora, said that the bank received 91 applications with an average value of Ksh11.2 million ($127,933) totalling Ksh1.021 billion ($11.6 million).

The two bond issues are also coming at a time when inflation is on an upward trend, with expectations of further rises in the short term.

Prices of basic commodities rose at the rate of 6.67 per cent in August, from 6.02 per cent in July due to an increase in fuel prices that pushed up kerosene, electricity and transport prices.

READ: Inflation, Syria crisis could slow Kenya's economic recovery

The latest market perception survey done by the banking regulator shows that large banks expect the inflation rate to edge up to an average of 7.6 per cent, medium banks 6.88 per cent, small banks 6.91 per cent and non-bank private firms 6.71 per cent for the remaining part of this year.

The CBK’s Monetary Policy Committee, during its last meeting at the beginning of this month, resolved to keep the Central Bank Rate at 8.5 per cent — a rate which has not changed since May — till the next meeting in November.

CBK Governor Prof Njuguna Ndung’u, in a statement after the last MPC meeting, attributed the current risks to the macroeconomic outlook to weak economic activity in the Eurozone and instability in the Middle East and North Africa, which could worsen.

He said that due to the instability in the region, international oil prices rose between June and August, contributing to the increase in domestic fuel prices, and that foreign exchange inflows from tea exports to the region, which account for about a third of Kenya’s tea exports, could also be affected.

“These developments, coupled with the high current account deficit, remain a threat to macroeconomic stability. Furthermore, implementation of the new VAT measures from this month will contribute to short-term increases in inflation, but the effects will be mild,” said Prof Ndung’u.

Due to the increase in the inflation rate, prices are going up at a faster pace, piling pressure on returns on investments and household incomes, which may not be going up at the same rate.

If this happens over a long time, returns will be worth less and when disposable incomes drop, households will spend, save or invest less, and this will have a negative impact on economic growth.