The Central Bank of Kenya is seeking to raise Sh30 billion from two reopened 10-year bonds in an auction that closes next month.
One of the bonds, first sold in 2016, has 1.8 years to maturity and has a coupon (fixed interest rate) of 15.039 per cent. The other paper, with a 13.49 per cent coupon, was initially auctioned in 2022 and has 7.6 years left to redemption.
The rate of return earned by investors does not have to match the coupons since the CBK offers discounts when a lower-yielding security is reopened in a high-interest-rate environment.
The discounts serve to lift the rate of return since interest is paid on the face value of the bond and an investor will also be paid the full principal at redemption despite paying a lesser amount.
A 10-year bond issued in March this year has the highest coupon of 16 per cent among its group of securities.
The weighted average rate on securities of similar duration or longer issued recently has mostly ranged between 16.5 per cent and 17.7 per cent as interest rates rose rapidly from last year.
The two bonds whose interest and discount is subject to a withholding tax rate of 10 per cent, will be on sale until October 9.
The jump in interest rates was caused by the government's borrowing appetite in the domestic market as well as the CBK’s actions that aimed to prop the shilling and lower inflation.
The monetary authority raised its benchmark lending rate multiple times to a peak of 13 per cent before lowering it to 12.75 per cent last month citing a now-stable exchange rate and a fall in the cost of living.
The rise in the Central Bank Rate (CBR) sent commercial bank lending rates above 20 per cent while interest on government bonds and Treasury bills rose to the current high teens.
High interest rates help to attract inflows of hard currencies going to government securities while also making it costlier to borrow for investment or consumption, ultimately containing inflation.
The CBK is expected to further cut its benchmark lending rate going forward, signalling that returns on fixed-income assets could also start falling from their current levels.
