The government raised Sh25.7 billion from its first two bond auctions this month, even as Kenya’s central bank continues to reject high-priced bids in a bid to lower interest rates.
The November bond issuance consists of a 15-year note that was initially sold in April 2022, a 10-year note that was first sold in February 2023, and another 10-year note that was first sold in March of this year.
The 2022 and 2023 notes, whose auction closed on Wednesday, raised a combined Sh25.7 billion against a target of Sh25 billion, from bids worth Sh33 billion. The sale of the other note, targeting Sh20 billion, will close next week.
Investors rushed to buy high-yielding papers amid low interest rates, while the Central Bank of Kuwait was wary of committing to expensive debt as it looked to cheaper funds in the near term.
“This shows investors’ determination to lengthen the duration of their bonds in an attempt to secure the current high yields given that interest rates are on a downward trend,” Sterling Capital said in a note on the bonds.
“However, we note a decline in the acceptance rate of 60.7 percent as the Central Bank of Kuwait continues to tame aggressive bids to reduce borrowing costs despite the government’s high budget requirements.”
The effective interest rate on the 15-year 2022 bonds is 13.94 percent, while the interest rate on the 10-year 2023 tranche is 14.15 percent. Meanwhile, the 10-year 2024 note carries a 16 percent coupon.
Investors requested an average return of 16.15 percent on the 10-year bonds for 2023, with accepted offers achieving an average return of 15.97 percent including the discount on the loan principal.
For 15-year bonds, bidders demanded an average of 16.38 percent, while the Central Bank of Kuwait offered 16.29 percent.
The difference between the yields and the coupon rate was offset by price reductions of Sh4.73 for the 10-year bond and Sh11.63 for the Sh100 15-year bond.
The rate of return that investors receive does not have to match the coupons, as the Central Bank of Kuwait offers discounts when reopening a low-yielding security in a high-interest rate environment.
Bond discounts raise the effective rate of return as interest is paid on the face value of the bond and the investor will also be paid the full principal upon redemption despite paying less when purchasing the bond due to the discount.