The interest rates on the dual-tranche January 2024 Treasury bond sale are expected to soar past the 18 percent mark as investors factor in the recent increase in the Central Bank of Kenya (CBK) base rate and the government’s upward revision of the domestic borrowing target.
Pre-auction analysis by three investment banks —Genghis Capital, Sterling Capital and AIB-AXYS Africa– projects bids falling between 18.3 percent and 18.9 percent for the bond offer, which comprises a new three-year bond and a third reopening of a five-year bond first sold in July.
The interest rate on the three-year will be market-determined. On the five-year paper, the coupon in its original sale was 16.84 percent, but two subsequent re-openings in August and October saw rates go up to 17.95 percent and 17.99 percent, respectively.
“We expect a large proportion of liquidity to be centred on the three-year while aggressive bidding will be more evident on the five-year paper. Our Weighted Average Rate of accepted investor bids prediction is as follows: three-year at 18.29 - 18.39 percent, (and) five-year at 18.39 - 18.49 percent,” said Sterling Capital in its note.
For Genghis, the expectation is that bidding for the three-year paper will range between 18.45 to 18.5 percent and between 18.65 and 18.85 percent for the five-year option.
AIB-AXYS Africa recommended its clients bids of between 18.55 and 18.75 percent for the three-year bond and 18.62-18.82 percent for the five-year paper. The decision in early December by the Monetary Policy Committee of the CBK to raise the base rate by two percentage points to 12.5 percent is seen as a key consideration by investors when pricing the January bond offer.
The recent adjustment—via the Supplementary Budget—in the net domestic borrowing target for the fiscal year to Sh474.5 billion from Sh415.1 billion has also signalled a higher appetite for funds by the government, meaning that the CBK is less likely to reject bids.
According to analysts at AIB-AXYS Africa, the regulator will also be keeping an eye on the Sh199.3 billion worth of domestic debt coupon and principal repayments due in January, with a significant portion of the bond likely to go towards rolling over maturities.
“This raises the impetus for the government to accede to higher yield payouts to meet net domestic borrowing requirements and allay looming liquidity risks,” said the AIB-AXYS analysts.
The pricing of the tax-free infrastructure bond sold in November is also likely to factor in bid pricing for the January Treasury bond sale.
The infrastructure bond, whose primary and tap sales were done before the base rate increase, pays an interest of 17.93 percent.
