Fixed Income Market Update – Week Ending 25th July 2025

Market Overview

The fixed income market exhibited mixed activity during the week, with strong demand for short-term Treasury bills contrasting with subdued liquidity conditions. Meanwhile, Kenya’s Eurobond yields declined, and the Kenyan shilling remained relatively stable against the USD.

Money Markets, T-Bills, and T-Bonds Primary Auction

T-Bills Auction Highlights

• Oversubscription Continues: The overall subscription rate for T-bills rose to 166.7% (vs. 115.9% the prior week), marking the second consecutive week of strong demand.
• Investor Preference for Short Tenor: The 91-day paper saw overwhelming demand, with a subscription rate of 405.8% (Kshs 16.2 bn bids vs. Kshs 4.0 bn offered), up sharply from 49.1% the prior week.
• Mixed Performance Across Tenors:
  • 182-day paper: Subscription fell to 32.0% (from 76.2%).
  • 364-day paper: Subscription improved to 205.9% (from 182.3%).
• Yield Decline: Yields edged lower across all tenors:
  • 91-day: Down 1.2 bps to 8.11%
  • 182-day: Down 1.2 bps to 8.41%
  • 364-day: Down 0.8 bps to 9.72%
• Acceptance Rate: The government accepted 63.8% of bids (Kshs 25.5 bn out of Kshs 40.0 bn received).

T-Bond Issuance

• The government reopened two infrastructure bonds (IFB1/2018/015 and IFB1/2022/019) to raise Kshs 90.0 bn, with:
  • Coupons: 12.5% (7.5-year tenor) and 13.0% (15.6-year tenor).
  • Sale period runs from 21st July to 13th August 2025.

Liquidity Conditions

• Interbank Rate Stability: The average interbank rate remained flat at ~9.6%, easing marginally by 1.7 bps, supported by tax remittances offsetting government payments.
• Higher Interbank Volumes: Average daily interbank trades rose 21.2% to Kshs 13.0 bn (from Kshs 10.8 bn).

Kenya Eurobonds Performance

• Yields declined, with the 10-year 2018 Eurobond seeing the sharpest drop:
  • Down 60.1 bps to 8.0% (from 8.6%).
• Reflects improved investor sentiment amid stabilizing macroeconomic conditions.

Kenya Shilling and Forex Reserves

• Marginal Depreciation: The KSh weakened slightly to Kshs 129.3/USD (from Kshs 129.2), a 1.6 bps decline.
• Year-to-Date (YTD): The shilling has appreciated 3.3% against the USD (vs. 17.6% in 2024).
• Forex Reserves Dip:
  • Reserves fell 3.9% to USD 10.7 bn (from USD 11.2 bn).
  • Covers 4.7 months of imports (above statutory 4.0-month requirement and EAC’s 4.5-month threshold).

Fiscal Performance Update (FY 2024/2025)

The National Treasury released preliminary fiscal data for the year ending June 2025, highlighting:

Revenue Collection

• Total Revenue: Kshs 2,430.1 bn (97.4% of revised target of Kshs 2,496.2 bn).
• Tax Revenue: Kshs 2,257.8 bn (97.9% of revised target).

Expenditure & Borrowing

• Total Expenditure: Kshs 3,986.7 bn (94.8% of revised estimates).
• Domestic Borrowing: Kshs 1,077.5 bn (89.7% of target).
• Debt Servicing: Kshs 1,559.9 bn (64.2% of revenue collected).

Key Takeaways

• Revenue Underperformance: Missed prorated targets for all 12 months but closed at 97.4% of full-year target.
• Business Conditions: PMI fell to 48.6 in June (from 49.6 in May), signaling contractionary pressures.
• Credit Relief: Lower borrowing costs provided some support to businesses and households.

Outlook

• T-Bill Demand to Persist: Investor preference for short-term papers likely to continue amid yield compression.
• Liquidity Watch: Interbank rates may face upward pressure if government borrowing accelerates.
• Fiscal Consolidation: Debt servicing remains a key concern, consuming 64.2% of revenues.

Conclusion: The market remains cautiously optimistic, with stable currency conditions and declining Eurobond yields offsetting fiscal pressures. Investors will monitor the upcoming bond auction and liquidity trends closely.

(Data Source: Central Bank of Kenya, National Treasury, Bloomberg)

Disclaimer: This report is for informational purposes only and does not constitute investment advice.