Kenya’s KSh10 Billion Bond Switch Attracts Just KSh3.79 Billion as Investors Hold Out for Better Terms

The Central Bank of Kenya accepted all KSh3.78579 billion of bids submitted at cost, producing a performance rate of 37.86 per cent. The nominal value of the securities switched was KSh3.89105 billion, according to the official auction result dated November 11, 2026.  The difference between the accepted cost and the nominal amount switched reflects the market pricing of the securities involved. The transaction was an exchange of existing government debt rather than a conventional auction in which the Treasury received an equivalent amount of new cash. The weak participation does not mean Kenya lost access to domestic financing. A separate bond auction attracted nearly KSh100 billion of bids only days earlier. Instead, the switch result indicates that investors found the particular combination of maturity, coupon, pricing and liquidity less attractive than retaining their existing securities. A debt-management transaction, not new borrowing A bond switch allows investors holding specified Treasury bills or bonds to exchange them for another government security. For the Treasury, the objective is normally to reduce the volume of debt approaching maturity and move part of the repayment obligation to a later date. Successful switches can smooth the government’s redemption profile, reduce the concentration of maturities and limit the amount that must be refinanced through future auctions. They can be especially useful when large Treasury-bill or bond repayments are approaching. For investors, however, participation is voluntary. Banks, pension funds, insurers, fund managers and individual investors will only exchange their securities if the destination bond offers an acceptable return after considering its price, remaining maturity, coupon income, tax treatment, liquidity and exposure to future interest-rate movements. Investors who consider the exchange unattractive can retain their securities and receive principal when they mature. The destination security in the November transaction was FXD4/2019/010. Although originally issued as a ten-year bond, it had approximately three years remaining before its November 12, 2029 maturity date. It carries an annual coupon of 12.28 per cent. The switch cleared at a weighted average yield of 11.24 per cent and a price of KSh108.5646 for every KSh100 of face value. The bond traded above its nominal value because its 12.28 per cent coupon was higher than the 11.24 per cent yield accepted in the transaction.  That distinction is important. A bond’s coupon is the interest payment calculated against its face value, while its yield measures the return investors expect after accounting for the price paid, coupon payments and time remaining before maturity. A higher coupon does not automatically mean a higher investment return if the bond is acquired at a substantial premium. Most participation came from 91-day Treasury bills The securities eligible for the switch included 91-day, 182-day and 364-day Treasury bills and the five-year FXD1/2023/005 bond. Most of the participation came from holders of the 91-day Treasury bill, who surrendered securities with a nominal value of KSh3.07225 billion. Holders of FXD1/2023/005 switched KSh785.25 million, while the 364-day Treasury bill contributed KSh33.3 million. Only KSh250,000 came from holders of the eligible 182-day bill.  The limited participation by holders of FXD1/2023/005 is particularly significant. That bond carries a coupon of approximately 16.84 per cent and matures in July 2028. Investors accepting the switch would have moved into a security paying a lower coupon and extended their exposure until November 2029. Independent market reporting attributed much of the weak uptake to the large coupon difference between the source and destination bonds. Some investors may have preferred to continue receiving the higher cash coupon until 2028 instead of extending the maturity of their investment for roughly another 16 months.  Coupon income was not the only consideration. Treasury-bill holders may have wanted their securities to mature so they could use the proceeds for liquidity or reinvest them at prevailing rates. Some investors may also expect market yields to rise, making future government securities more attractive. Extending maturity increases interest-rate risk. When market yields rise, the resale value of an existing fixed-rate bond generally falls. Investors expecting higher rates may therefore prefer shorter securities that mature sooner, allowing them to reinvest without carrying a mark-to-market loss on a longer-dated bond. Participation fell sharply from previous switches The November performance was considerably weaker than Kenya’s two preceding switch transactions. In September, a KSh10 billion switch into the same FXD4/2019/010 bond attracted KSh13.52 billion of bids. CBK accepted KSh11.02 billion at a weighted average yield of 11.1398 per cent and an average price of KSh106.7968 per KSh100 of face value.  The October switch, which used a different destination bond, attracted KSh9.08 billion of bids against a KSh10 billion offer. CBK accepted KSh8.96 billion. The destination security had approximately 6.6 years remaining to maturity and cleared at an average yield of 12.6112 per cent.  November’s KSh3.79 billion result therefore represents a sharp decline in participation. The comparison also demonstrates that investor appetite can change significantly depending on which securities are being exchanged and the terms attached to the destination bond. The result is best understood as a market-pricing signal. Investors were not necessarily refusing to finance the Kenyan government. They were declining to exchange securities they already considered more suitable for a specific bond at the terms offered. Conventional bond demand remained strong Evidence from a separate conventional auction reinforces that interpretation. A November auction of reopened 15-year and 30-year Treasury bonds attracted bids worth KSh99.47 billion against a KSh50 billion offer. CBK accepted KSh70.86 billion, equivalent to an overall performance rate of 198.93 per cent. The reopened 15-year bond, with approximately 7.8 years remaining to maturity, attracted KSh37.07 billion in bids and cleared at an accepted average yield of 12.7404 per cent. The 30-year security, with about 29.5 years remaining, received KSh62.40 billion of bids and cleared at 14.1266 per cent. centralbank.go.ke The 30-year bond carries a 12.5 per cent coupon, below the yield investors demanded. It was consequently allocated at an average price of KSh89.3921 for every KSh100 of face value. The contrast with the switch auction is revealing. Investors were willing to commit substantial funds, including for a security maturing in 2056, when the price and yield compensated them for the longer maturity and associated risks. The conventional auction also shows how Kenya is using domestic borrowing both to refinance existing obligations and obtain additional budgetary financing. Of the KSh70.86 billion accepted, KSh40.46 billion was allocated to redemptions and KSh30.40 billion represented new borrowing. The immediate effect on Kenya’s refinancing programme Because the November switch fell KSh6.21 billion short of its target, more of the eligible source securities will remain outstanding and have to be repaid when they mature. That does not constitute an immediate debt crisis. The amount is relatively small compared with Kenya’s total domestic debt market, and the strong conventional auction demonstrates that the government continues to attract domestic financing. It does, however, limit the Treasury’s ability to reduce near-term refinancing requirements through this particular transaction. If switches repeatedly attract weak participation, the government may have to repay maturing securities using revenue, issue replacement debt at prevailing market rates or improve the terms offered in future exchanges. Each option has a cost. Repaying debt from revenue can reduce the resources available for public services and development expenditure. Issuing replacement debt exposes the Treasury to future market yields, while offering more generous switch terms could increase debt-servicing costs. The government must therefore balance two objectives: reducing refinancing risk without locking taxpayers into unnecessarily expensive borrowing. Why sovereign yields matter to businesses and households Government-bond pricing is not confined to the Treasury and institutional investors. Sovereign securities form the benchmark against which banks and capital-market investors assess other lending opportunities. If the government must offer higher yields to attract long-term financing, private borrowers may also face higher funding costs. Banks can purchase government securities without taking the same credit risk they assume when lending to a company. Businesses must therefore offer a return that compensates lenders for risk above the sovereign benchmark. Higher government yields can consequently affect corporate bonds, infrastructure financing, mortgages and commercial-bank lending. They may also encourage financial institutions to allocate more of their balance sheets to government securities instead of expanding private-sector credit. For pension funds and insurers, longer-dated government bonds can provide assets that match long-term liabilities. Their willingness to purchase those securities nevertheless depends on whether the yield is sufficient to protect the real value of their portfolios against inflation and future interest-rate changes. For money-market funds and banks managing short-term liquidity, Treasury bills may remain preferable because they mature quickly and can be reinvested. The low switch participation therefore also reflects the different cash-flow requirements of investors rather than a single market view. November auction will provide the next yield signal The next test of investor appetite is the reopened 15-year FXD1/2019/015 and 30-year SDB1/2011/030 bond sale. CBK is seeking a combined KSh50 billion for budgetary support, with bids scheduled to close at 10am on November 18. The securities have approximately 7.3 years and 14.3 years remaining to maturity, respectively. FXD1/2019/015 carries a coupon of 12.857 per cent, while SDB1/2011/030 carries a 12 per cent coupon. The bonds will be sold through a multi-price auction, meaning the final accepted yields and prices will provide a clearer indication of what investors currently require for medium- and long-term Kenyan government debt.  Those auction yields will matter more than the stated coupons. If investors demand yields above the coupon rates, the bonds will have to be issued at discounts to compensate buyers. Persistent upward pressure on yields would raise the cost of refinancing debt and could influence borrowing conditions across the wider economy. The November switch should therefore not be read as a collapse in demand for Kenyan government securities. It was a rejection of a particular exchange proposition. Investors remain willing to finance the government, but the result shows that they are carefully distinguishing between instruments. Maturity, liquidity, market price, tax treatment and expected total return are becoming increasingly important as Kenya seeks to extend its domestic debt profile without paying an excessive refinancing premium.