Yields on Kenya’s long-dated Treasury bonds breach 14% ceiling

Yields on Kenya’s long-dated 25-year Treasury bonds have breached the 14 per cent ceiling as interest rates on government securities continue to soar this year.

The weighted average rate of accepted bids for the new 25-year Treasury bond whose bidding closed on Tuesday this week stood at 14.188 per cent, to stand above the 14 per cent for the first time in recent years.

The yields on the longest dated Treasury instrument in the domestic market has nevertheless been knocking on the door of 14 per cent in higher interest rate environment.

The last 25-year paper offer, a reopening in May for instance closed with the average return on accepted bids standing at 13.976 per cent.

Meanwhile, yields on the paper stood at a lower 13.823 per cent at this time last year.

Churchill Ogutu, an economist at IC Asset Managers, says the breaching of the ceiling on the long-dated Treasuries is an outcome of a high interest environment which has inversed a prior low interest rate environment.

“We have been in a low yield environment at the primary market for a while now, beginning with the rate cap period and followed by the COVID-19 era. Right before the rate cap came into effect, we had the 10-year bond with a 15 per cent coupon. Right now interest rates have begun teeing upwards with inflation,” he said.

Higher interest rates on the longer-dated Treasury bonds, shorter timed T-bonds and even Treasury bills will see the government pay a premium for borrowing in the domestic market.

Despite the lucrative yield on offer, investors have largely stayed off Treasury bonds to leave the government behind its fiscal year domestic borrowing target as seen in recent auction undersubscriptions.

According to Mr. Ogutu, the government is walking a tight rope as it is forced to accept expensive investor bids for bonds to meet the target even as it is aware of the cost implications.

“It’s a matter of the government choosing the lesser evil; mopping the bids to rev up domestic borrowing against rejecting the aggressive bids and end up lagging further behind the borrowing curve,” he added.

While aware of the cost implications presented by higher yields to government borrowing, Treasury CS nominee Prof. Njuguna Ndung’u has intimated at plans to retire the majority of Kenya’s domestic debt by contracting cheaper concessional funds.