The underperformance was driven by unattractive yield differentials. Investors were offered the chance to swap 5-year bonds maturing in July 2028, which carry a coupon of 16.84 percent, for 10-year bonds maturing in November 2029 with a coupon of 12.28 percent. Fixed income analysts noted that the additional 15-month duration offered by the 10-year paper did not justify the nearly five-percentage-point drop in annual interest. Furthermore, the 5-year bond’s lower withholding tax rate of 10 percent compared to the 10-year bond’s 15 percent rate made the shorter instrument more appealing. Consequently, holders of 91-day Treasury bills contributed the bulk of the swap amount, transferring Ksh3.07 billion, while 5-year bond holders swapped only Ksh785.25 million.
Despite the swap difficulty, the CBK continues to intensify domestic debt financing through new long-term bond auctions. In a move to align with its 2026-2029 Medium-Term Debt Strategy, which aims to reduce short-term T-bill stock and lengthen the maturity profile, the central bank has reopened and issued several long-dated fixed-coupon bonds. Recent issuances include the FXD1/2022/025, a 25-year bond offering a coupon of 14.188 percent, and the FXD1/2019/015, a 15-year bond with a coupon of 12.857 percent.
In its second bond auction of the 2026/27 financial year, conducted on July 22, 2026, the CBK offered Ksh40 billion across 20-year and 25-year tranches, deliberately excluding the 10-year instrument. This strategic omission followed the July 8 opening auction, where the 10-year tranche (FXD1/2022/010) absorbed 71.9 percent of total bids, leaving longer tenors severely undersubscribed. By removing the shorter anchor, the CBK is attempting to drive investor appetite toward the long end of the curve. Currently, two auctions into the fiscal year, the CBK has raised Ksh70.60 billion in net bond proceeds, representing approximately 12.4 percent of the full-year domestic securities target of Ksh890.4 billion.
Investors can participate in these long-term instruments through competitive or non-competitive bids, with minimum investments starting at Ksh50,000 for retail clients and Saccos. All listed bonds are subject to a 10 percent withholding tax on interest earnings and are traded on the Nairobi Securities Exchange. The next major test for this strategy will be the continued absorption of the 20-year FXD1/2019/020, which carries a 12.873 percent coupon, a rate currently below prevailing market yields for comparable long-dated instruments.
