The Central Bank of Kenya (CBK) is still planning to switch two more bonds into longer securities before June, despite investors rejecting the last such sale earlier this month.

CBK Governor Kamau Thugge said that unfriendly market conditions caused by the geopolitical uncertainty around the Iran war were behind the flop of the April 13 switch bond auction, which was the third such issuance since January.

In this April sale, the Treasury offered investors a chance to swap Sh20 billion from a 10-year paper that matures in August into a 15-year bond that comes due in 2033. Investors agreed to swap only Sh1.75 billion, forcing the State to pay them Sh18.2 billion in August.

The 10-year paper has been paying holders 15.04 percent in annual interest, while the 15-year, which has been in the market since May 2018, pays investors 12.65 percent annually.

The Treasury’s annual borrowing plan for 2025/2026 indicated that it would pursue five switch sales within the fiscal year. Two remain outstanding, targeting a three-year bond that matures in January 2027 and a 15-year paper that will be maturing in September 2027.

The three-year bond has an outstanding value of Sh91.6 billion, and the 15-year has a value of Sh90.94 billion, although the CBK is likely to pursue partial refinancing, going by the recent sales.

“In the previous ones we did relatively well, but right now there’s a wait-and-see approach since too many things are happening. That’s why there was underperformance in the latest one,” said Dr Thugge.

“It is a legitimate way of liability management and part of the instruments for us to ensure that we stretch out repayments and don’t have a refinancing risk. It is something we will continue to use, considering the recent outcome is more a reflection of the uncertainties that are existing everywhere.”

A switch bond issuance involves the direct conversion of maturing Treasury bills and bonds into a longer term security, cushioning the exchequer from a liquidity crisis in the short term.

Before the start of the Iran war at the end of February, interest rates were expected to keep declining in line with the sustained monetary easing actions of the CBK.

The apex bank had cut its policy rate by a cumulative 4.25 percentage points to 8.75 percent in 10 straight monetary policy committee (MPC) meetings between August 2024 and February 2026.

The CBK halted the easing in last week’s MPC meeting with a hold at 8.75 percent, pointing to concerns about emerging inflationary pressure from higher energy prices.

According to analysts, the market has taken cue and is now adjusting its rate expectations upwards. In such instances, investors would prefer to hold on to a liquid position, in order to be able to take advantage of higher rates in case inflation goes up in the near term.

This worked against the CBK’s request to investors to swap the 10-year paper into a longer, cheaper option.

The April swap was the third one in 2026, but was the only one to be undersubscribed.

The first of the swaps was done in January 2026, targeting Sh20 billion on the same 10-year, 2016 paper that was being switched in the April sale. In the offer, investors agreed to roll over Sh25.17 billion worth of notes into a 15-year paper that was floated in 2022, at an annual interest rate of 13.94 percent.

The second switch sale targeting Sh15 billion was carried out in March, where holders of a five-year bond of a coupon of 11.37 percent that is due to mature in November this year transferred Sh18.4 billion into a 15-year bond that was issued in 2019 at 12.34 percent.

→ cmwaniki@ke.nationmedia.com

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