Interest on November bond rises to record 17.9pc as bids hit Sh89 billion

The Treasury has raised Sh67 billion from the concluded sale of November’s infrastructure bond which came with the highest interest rate of 17.93 percent amid oversubscription of the offer.

This is as investors put in bids of Sh88.8 billion against the target of Sh50 billion in the auction which closed on Wednesday.

Investors continued demanding a premium return on the 6.5-year tax-free paper with the market-weighted average rate reaching 18.1 percent while the average rate of accepted bids stood at 17.93 percent.

Read: Investors offer Sh56 billion in November Treasury bond sale

The bond now has the highest return among the outstanding debt securities, with the Central Bank of Kenya steadily offering higher rates to raise funds in its role as the government’s fiscal agent.

The high investor subscription to the paper is widely in line with market expectations based on its tax-free incentive. Interest earned on long-term bonds attracts a withholding tax of 10 percent compared to 15 percent on those with a tenor of five years and below.

“The infrastructure bond auction was oversubscribed on account of its relatively attractive tenor, tax-free status, liquidity and its high potential for capital gains,” noted analysts from Sterling Capital.

The bond’s premium coupon has meanwhile been attributed to investors pricing in the government’s current fiscal deficit and the elevated interest rate environment which has budded aggressive bidding.

Further, recent revisions in the Central Bank Rate and underperforming revenues have influenced the uptick in yields.

November’s infrastructure bond was the third for the 2023 calendar year and the first for the 2023/24 financial year.

The oversubscription is expected to prop the government’s domestic borrowing for the fiscal year to June after previous bond issues strived to meet set subscription targets.

By June next year, the National Treasury is expected to mobilise at least Sh415.3 billion in domestic financing.

The net domestic revenue target has been revised upwards to an estimated 2.6 percent of GDP under the 1st 2023/24 budget estimates after the overall fiscal deficit was revised from 4.4 percent to 5.3 percent of GDP.

Read: Acorn to pay Sh860m bonds early

The revision has come against a five percent increase in the original budget by Sh187.2 billion to Sh3.93 trillion. Proceeds from the November infrastructure bond are fully expected to go into new borrowing.

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