CBK Goes Ham On Eurobonds As It Waters Down Its Appetite For Domestic Borrowing

After the successful launch of a $1.5 billion Eurobond, which contributed to the partial repurchase of the June 2024 Eurobond, and the remarkable achievement of raising KES 240.96 billion from the February Infrastructure Bond (IFB) — an impressive 412.37% over the target — the Central Bank of Kenya (CBK) is showing signs of reducing its reliance on domestic borrowing, as it nears its domestic borrowing goal.

This shift is underscored by the recent outcomes of the March bond issuance for the 5-year and 10-year bonds, where the CBK declined KES 37.1 billion in offers.

The move was particularly noticeable in the latest 10-year bond issuance, where the CBK rejected KES 19.05 billion in bids, with the market’s weighted average rate reaching 17.76%, surpassing the established coupon rate of 16.00% as the CBK implements its strategy to gradually lower the interest rates on domestic debt.

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This phenomenon is also present in the treasury bill market which has seen rates remain below the 17% mark with the average rate changes slowing to only 2bps per week from 12bp per week in February. This comes as the CBK limits its debt acceptance to only cover upcoming maturities.

The CBK intervention on the yield curve comes at a time when analysts warned that the continued inversion of the yield curve posed a threat to bondholders’ wealth with most bondholders recording losses on their 2 to 20-year treasury bonds.

The increasing yields would also exacerbate default risks as the government would be required to pay more for interest further worsening its short-term liquidity challenges.

“We expect yields on government securities to begin to taper off in the near term as the macroeconomic environment improves due to lower inflation and a strengthening shilling. However, government revenue collection missing set targets might force the CBK to accept more aggressive bids to plug the shortfall in revenue further adding pressure on local yields,” said analysts from Genghis Capital.

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