CBK Borrows KSh 57.51B From Investors at Rates Above 12.70% on Long BondsCBK Borrows KSh 57.51B From Investors at Rates Above 12.70% on Long Bonds

For ordinary savers, pension funds and banks, the auction shows how much return they can still demand for lending to the government for decades. For taxpayers, it shows what the state pays for that money, since every shilling raised must be repaid with interest.

According to the CBK auction results, the bank accepted KSh 28.60B ($220.12M) on the reopened 15-year bond FXD3/2019/015 and KSh 28.90B ($222.43M) on the reopened 20-year bond FXD1/2019/020. A reopened bond is an existing bond sold again, so it keeps its original coupon, the fixed yearly interest rate printed on it.

Why the 15-year bond drew weaker demand

Investors bid KSh 34.56B ($265.96M) for the 15-year bond, which is 69.12% of the KSh 50B offered. The auction results imply that KSh 50B target for each bond, though the sheet does not label it. The bid-to-cover ratio, which compares bids received with the amount sold, was 1.21 on the 15-year bond.

Bidding was stronger on the 20-year bond, at KSh 46.00B ($354.04M), or 92.01% of the target, with a bid-to-cover ratio of 1.59. The CBK accepted a weighted average rate of 12.73% on the 15-year bond and 13.60% on the 20-year bond.

Those rates sit above the coupons. The 15-year bond carries 12.34% and the 20-year bond carries 12.87%. Because the bonds were sold at different prices, the effective return, known as the yield, moves away from the coupon. The 20-year bond sold at about KSh 95.68 for every KSh 100 of face value, a discount that raises the investor's yield above the coupon.

Small bidders carried the sale

Almost all of the money came from non-competitive bids. These come from investors who agree to accept the average rate set at the auction rather than naming their own. They made up KSh 26.84B ($206.55M) of the 15-year total and KSh 27.84B ($214.28M) of the 20-year total. Competitive bids, where investors name the rate they want, accepted only KSh 1.76B ($13.58M) and KSh 1.06B ($8.15M) respectively.

That pattern matters because competitive bidders, mostly banks and large funds, are the ones who set the price. As Mwenendo earlier reported on how bond trading tops KSh2.5T, heavy trading in government securities does not by itself show money moving net into bonds.

What it means for borrowers and savers

Government borrowing at these rates competes with private lending. In an earlier report by Mwenendo, record bank lending of KSh 99.40B ($764.96M) in September came with average lending rates near 14.40%. When the government offers more than 13% on a 20-year bond, banks have less reason to cut rates for businesses and households.

For savers, the auction shows that long government paper still pays well, though the money is tied up for years and the price can fall if rates rise. Mwenendo also earlier reported how the CBK's September bond offer opened a fresh debt push, and this result adds to it.

The sheet does not say whether the money will refinance maturing debt or fund new spending, as the options on the form were left unselected. Readers should treat the purpose of the funds as unconfirmed until the Treasury or CBK says so. Dollar figures use the CBK's rate of KSh 129.94 to the dollar on 8 October, so the conversions are indicative, not the rate on the day of the auction.