The fixed income market remained firmly supported by strong liquidity conditions during the week, with both Treasury bills and Treasury bonds recording significant oversubscription. The Central Bank of Kenya (CBK) further reinforced the easing cycle with a 25 basis points reduction in the Central Bank Rate (CBR), while macroeconomic fundamentals remained broadly stable.

The combination of declining yields, accommodative monetary policy, stable exchange rates, and moderating inflation continues to underpin demand for government securities.

Money Markets & Treasury Bills Auction

Treasury bills were oversubscribed for the third consecutive week, with overall subscription rising to 308.8%, up from 267.8% the previous week.

Investor Positioning

Investor demand remained concentrated in longer tenors:

• 91-day paper: 179.5% subscription (down from 323.9%)
• 182-day paper: 68.8% subscription (up from 5.0%)
• 364-day paper: 600.5% subscription (up from 508.3%)

The sharp increase in demand for the 364-day paper signals:

• Improved investor confidence in short-to-medium term macro stability
• Expectations of further yield compression
• Increased appetite for locking in higher duration exposure before rates fall further

Despite receiving bids worth Kshs 74.1 bn, the government accepted Kshs 44.8 bn, translating to an acceptance rate of 60.5%, reflecting disciplined yield management.

Yield Movements

Yields declined across the curve:

• 364-day: down 22.4 bps to 9.0%
• 91-day: down 2.0 bps to 7.6%
• 182-day: down 1.8 bps to 7.8%

The continued downward movement reflects:

• Elevated system liquidity
• Reduced borrowing pressure
• Ongoing monetary easing

Primary Bond Market

The CBK released results for the reopened bonds:

• FXD3/2019/015 (8.4-year tenor, 12.3% coupon)
• FXD1/2018/025 (17.3-year tenor, 13.4% coupon)

The bonds recorded strong demand, with total bids of Kshs 213.7 bn against an offer of Kshs 50.0 bn, translating to an oversubscription rate of 427.5%.

The government accepted Kshs 100.5 bn, implying a 47.0% acceptance rate.

Pricing & Real Returns

Weighted average accepted yields:

• FXD3/2019/015: 12.2% (down from 12.6% in November 2025)
• FXD1/2018/025: 13.4% (down from 14.3% in July 2025)

With January inflation at 4.4%, real returns stand at:

• 7.8% for FXD3/2019/015
• 9.0% for FXD1/2018/025

The compression in yields confirms:

• Market confidence in macro stability
• Improved external liquidity position
• Expectations of a lower interest rate environment

Liquidity Conditions

Liquidity conditions eased during the week:

• Interbank rate: declined to 8.9% from 9.0%
• Average volumes traded: increased 11.7% to Kshs 7.5 bn

The easing was largely supported by government payments offsetting tax remittances.

Overall liquidity remains supportive of continued yield compression in the short term.

Kenya Eurobond Market

Eurobond yields recorded mixed performance:

• 13-year (2021) & 7-year (2024) bonds: up 5 bps
• 10-year (2018) & 12-year (2019) bonds: down 1 bp

Movements remain marginal and reflect:

• Stable external sentiment
• Anchored sovereign risk perception
• Strengthened FX reserves

Currency & Reserves

• The Kenya Shilling remained stable at Kshs 129.0/USD
• YTD appreciation stands at 2.3 bps
• FX reserves increased to USD 12.5 bn, equivalent to 5.4 months of import cover

Reserve adequacy remains comfortably above the statutory minimum of 4.0 months.

Key Policy Highlight

MPC February 2026 Decision

The Monetary Policy Committee cut the CBR by 25 bps to 8.75%, marking another step in the easing cycle.

Inflation Dynamics

• Headline inflation declined to 4.4% in January (from 4.5%)
• Core inflation rose slightly to 2.2%
• Non-core inflation declined to 10.3%

Inflation remains well within the 2.5%–7.5% target range and below midpoint.

Growth Outlook

• 2025 GDP growth estimated at 4.9%
• 2026 projected at 5.5%
• 2027 projected at 5.6%

Credit growth improved to 6.4%, reflecting better monetary transmission.

The MPC also narrowed the interest rate corridor from ±75 bps to ±50 bps to enhance alignment between KESONIA and the CBR — a structural improvement to policy transmission.

Outlook: While easing may continue, we expect a more cautious pace going forward to preserve exchange rate stability.

Fiscal Position

Exchequer Update – January 2026

Revenue collection reached Kshs 1,437.2 bn, equivalent to 89.4% of prorated targets.

Key observations:

• Tax revenues at 87.7% of prorated target
• Domestic borrowing exceeded prorated target (114.3%)
• Debt service cost equals 74.8% of cumulative revenues
• Development expenditure remains subdued (70.6% absorption)

While revenue performance remains below target, fiscal consolidation efforts continue.

Structural Development

National Infrastructure Fund Bill 2026

The proposed Bill introduces a commercially driven infrastructure financing vehicle aimed at:

• Mobilizing private capital
• Reducing reliance on public debt
• Funding viable infrastructure projects through PPPs and SPVs
• Ring-fencing funds strictly for capital expenditure

If implemented effectively, this could:

• Reduce fiscal strain
• Improve debt sustainability
• Enhance infrastructure delivery

Fuel Prices & Inflation Outlook

EPRA announced the second consecutive fuel price reduction in 2026:

• Petrol: down Kshs 4.2
• Diesel: down Kshs 3.9
• Kerosene: down Kshs 1.0

Crude oil prices declined 10.6% year-on-year.

Fuel stabilization measures and exchange rate stability continue to anchor inflation expectations.

We expect inflation to remain within the CBK’s target range in the short-to-medium term.

Overall Fixed Income Outlook

The fixed income market remains characterized by:

• Strong investor demand
• Declining yields
• Improved real returns
• Stable macro fundamentals
• Continued monetary easing

However, fiscal pressures remain elevated, particularly given the high debt-service-to-revenue ratio.

In the near term, we expect:

• Continued strong demand for government securities
• Gradual yield compression
• A cautious MPC stance
• Stable currency dynamics

The environment remains supportive for fixed income investors seeking positive real returns amid controlled inflation and improving liquidity conditions.