The Central Bank of Kenya (CBK) has announced the issuance of a new 10-year bond with an attractive 16 per cent return, aiming to encourage investors to hold onto longer-term government securities.

This marks the longest-dated bond issued by the Kenyan government in over a year and signifies a shift in CBK's strategy to address the risk of concentrated bond maturities.

Previously, the CBK allowed market forces to determine the interest rates on new bonds.

However, this 16 per cent offering serves as a "bidding guidance" and suggests an intention to gradually decrease rates.

Notably, this rate is lower than the 18.46 per cent offered on the recent 8.5-year tax-free infrastructure bond.

While interest on this 10-year bond will be subject to a 10 per cent tax, its return surpasses similar existing securities.

For example, two 15-year bonds maturing in 2034 currently offer coupons of 12.85 per cent and 12.73 per cent, respectively.

Additionally, the sole 10-year bond issued last February has a current coupon rate of 14.15 per cent.

Previously, the CBK had avoided issuing longer-term bonds due to concerns about higher interest rates that would lead to increased long-term domestic debt costs.

Consequently, they opted for short-term securities (mostly 3-5 years), impacting the average maturity of government bonds.

"Issuing substantial amounts of long-dated bonds during high-interest-rate periods pushes the entire yield curve outwards, significantly impacting the cost of servicing domestic debt," the CBK explains in its latest financial sector stability report.

The upcoming March bond auction aims to raise Sh40 billion and includes two previously issued bonds - a 3-year and a 5-year paper with remaining maturities of 2.9 and 4.4 years, respectively.

These bonds have existing coupon rates of 18.38 per cent and 16.84 per cent, and the CBK is expected to control new investor bids by rejecting excessively high offers.

Following the rejection of Sh47.7 billion in bids during the February infrastructure bond sale, the CBK has demonstrated its willingness to take this approach.

The auction for the reopened 3-year paper will run until March 6th, while the reopened 5-year and the new 10-year paper auctions will end on March 20th.

The success of the Sh240.9 billion infrastructure bond sale has significantly reduced pressure on the CBK to meet its domestic borrowing target, allowing them greater flexibility in managing investor bids.

Furthermore, the strong foreign investor participation in this bond issuance signals a renewed interest in Kenyan government securities.

The new 10-year bond is expected to be particularly attractive to pension and insurance funds, which are typically more comfortable with holding longer-term investments compared to commercial banks.