Weak Investor Uptake Casts Doubt on CBK’s Switch Bond Strategy

The Central Bank of Kenya is pushing ahead with its plan to refinance maturing debt through switch bond sales, even after the latest offer recorded weak investor uptake. The move signals that the State still considers the instrument important in managing near term repayment pressure, despite growing uncertainty in the market.

CBK Governor Kamau Thugge said the low participation in the April 13 auction was not necessarily a rejection of the strategy. Instead, he linked it to unsettled market conditions tied to the Iran war and the uncertainty it has created around interest rate expectations. In that sale, investors were offered the option of swapping Sh20 billion from a 10 year bond maturing in August into a 15 year paper due in 2033.

However, the response was limited, with only Sh1.75 billion rolled over, leaving the Treasury to repay Sh18.2 billion in cash. The outcome reflects investor hesitation, especially as the maturing bond offers a higher return of 15.04 percent compared to 12.65 percent on the longer dated replacement. This gap has made the switch less attractive at a time when investors are cautious about locking in lower returns.

Despite the setback, the government plans to conduct two more switch operations before June. These will target a three year bond maturing in January 2027 and a 15 year bond maturing in September 2027, with outstanding amounts of Sh91.6 billion and Sh90.94 billion respectively. The broader aim is to extend debt maturities, reduce refinancing risk, and ease pressure from large, clustered repayments.

Earlier operations had shown stronger results, with the January switch attracting Sh25.17 billion against a Sh20 billion target, while the March exercise drew Sh18.4 billion against a Sh15 billion target. However, shifting market expectations are now influencing investor decisions, particularly after the Central Bank paused its rate at 8.75 percent and as fears of inflation rise due to higher energy costs.