The Central Bank of Kenya (CBK) is encountering a significant test in its efforts to manage the cost of government borrowing, particularly in the ongoing sale of the Sh35 billion January 2024 Treasury bond. This bond sale is the first since the CBK raised the base lending rate by two percentage points.
Key Points:
- Bond Sale Structure: The CBK has divided the sale into two tranches, featuring a new three-year bond and the third re-opening of a five-year bond initially sold in July.
- Market-Determined Rates: The interest rate on the three-year bond will be determined by the market. In contrast, the five-year bond, initially sold at a coupon rate of 16.84 percent, saw subsequent reopenings in August and October with rates escalating to 17.95 percent and 17.99 percent, respectively.
- Base Rate Increase Impact: The recent increase in the base lending rate by the CBK is anticipated to lead to more aggressive bidding by investors for both the three-year and five-year bonds.
- Yield Curve Dynamics: Analysts expect a steeper inversion of the yield curve in response to the base rate increase. Long-term bonds may lead to a flattening of the yield curve, but this could be economically burdensome for the government.
- Investor Behavior: Investors are likely to focus on short-term bonds for the next six months or until the US Federal Reserve signals a rate cut in the coming year.
- Tax-Free Infrastructure Bond (IFB) Influence: The pricing of the tax-free infrastructure bond (IFB) from the previous month is expected to influence bid pricing for the January bond sale.
- Rising Debt Servicing Costs: The government’s expenditure on servicing domestic debt between July and November amounted to Sh517.1 billion. A revised net borrowing target of Sh471.4 billion for 2023/2024 increases pressure on the CBK to balance strict bid acceptance standards with raising necessary funds.
- Budget Deficit Challenge: The government’s need to fill the budget deficit adds complexity, requiring the CBK to manage the balance between servicing debt and acquiring new funding.
Conclusion: The Central Bank of Kenya faces a complex challenge in maintaining control over government borrowing costs, especially in the wake of a base rate increase. The outcome of the January 2024 Treasury bond sale will provide insights into investor behavior and the CBK’s ability to strike a balance between fiscal responsibility and economic stimulus.
