Kenya’s fixed income market remained liquidity-driven during the week, with Treasury Bills recording strong oversubscription for the fourth consecutive week and yields continuing their downward trajectory. At the same time, the government intensified its external liability management strategy through a Eurobond buyback and a new USD 2.3 bn dual-tranche issuance, while the 2026 Budget Policy Statement (BPS) outlined a moderated fiscal consolidation path.

Overall, the macro-financial environment remains characterized by ample liquidity, easing domestic yields, stable exchange rate dynamics, and improved external buffers.

Money Markets & Treasury Bills Auction

Treasury Bills were oversubscribed for the fourth consecutive week, with the overall subscription rate coming in at 295.6%, slightly lower than the 308.8% recorded the previous week.

Investor Demand Dynamics

Investor preference continued to tilt toward shorter tenors:

• 91-day paper: 326.2% subscription (up from 179.5%)
• 182-day paper: 113.6% subscription (up from 68.8%)
• 364-day paper: 465.4% subscription (down from 600.5%)

While the 364-day paper still attracted strong demand, the relative shift toward the 91-day and 182-day tenors suggests tactical positioning amid expectations of further yield compression following the recent Monetary Policy Committee (MPC) rate cut.

The government accepted Kshs 49.1 bn out of Kshs 70.9 bn bids received, translating to an acceptance rate of 69.2%, reflecting continued yield discipline.

Yield Movements

Yields continued their downward trend:

• 364-day: declined 7.5 bps to 8.9%
• 91-day: declined 2.0 bps to 7.6%
• 182-day: declined 2.0 bps to 7.8%

The decline reflects:

• Elevated system liquidity
• Reduced borrowing pressure
• Improved inflation outlook
• Policy rate easing to 8.75%

Short-term real returns remain positive given inflation at 4.4%, supporting continued investor appetite.

Liquidity Conditions

Liquidity in the money market eased further during the week:

• Average interbank rate: declined 14.5 bps to 8.8%
• Interbank volumes traded: increased 22.2% to Kshs 9.1 bn

The easing was supported by government payments offsetting tax remittances.

The sustained decline in interbank rates signals improving monetary transmission following the narrowing of the interest rate corridor and the recent CBR cut.

Kenya Eurobond Market

Eurobond yields recorded mixed performance:

• 13-year (2021): up 24 bps to 8.1%
• 10-year (2018): down 7 bps to 6.1%

The divergence reflects:

• Market repositioning ahead of the new issuance
• Ongoing liability management operations
• External investor recalibration following the buyback announcement

Despite short-term volatility, Kenya’s sovereign risk perception remains broadly stable.

Currency & External Position

• The Kenya Shilling remained stable at Kshs 129.0/USD
• Year-to-date appreciation stands at 2.3 bps
• FX reserves rose to USD 12.7 bn, equivalent to 5.5 months of import cover

The increase in reserves is attributable to:

• Eurobond buyback operations
• Strong diaspora remittance inflows
• CBK foreign exchange purchases

Reserve coverage remains comfortably above the statutory minimum of 4.0 months, strengthening external stability.

Weekly Policy & Fiscal Highlights

2026 Budget Policy Statement (BPS)

The 2026 BPS outlines medium-term fiscal priorities under the FY’2026/27–FY’2027/28 framework.

Key Fiscal Projections

• Revenue: projected at Kshs 3,533.7 bn (+5.4%)
• Total revenue & grants: Kshs 3,588.1 bn (+5.8%)
• Total expenditure: Kshs 4,703.9 bn (+3.8%)
• Fiscal deficit: projected at Kshs 1,115.8 bn (5.3% of GDP, down from 6.0%)

Borrowing Mix

Total borrowing is projected at Kshs 1,115.8 bn, comprising:

• Net foreign borrowing: Kshs 225.5 bn
• Net domestic borrowing: Kshs 890.4 bn

The continued reliance on domestic borrowing reflects:

• Cautious external market access
• Efforts to manage FX risk
• Preference for local market liquidity

While the deficit narrows moderately, recurrent expenditure remains dominant at 73.5% of total spending, highlighting structural fiscal rigidities.

Eurobond Buyback & New Issuance

The government announced a buyback offer for:

• USD 1.2 bn 2032 notes
• USD 0.4 bn 2028 notes

The buyback is capped at USD 500 mn.

Simultaneously, Kenya raised USD 2.3 bn via a dual-tranche issuance:

• USD 900 mn (7-year, 7.9%, amortizing 2032–2034)
• USD 1.4 bn (12-year, 8.7%, amortizing 2037–2039)

Of the proceeds:

• USD 500 mn will fund the buyback
• USD 1.8 bn will support budget financing

Strategic Implications

The liability management operation:

✔ Smooths external maturity profile
✔ Reduces near-term refinancing risk
✔ Demonstrates continued market access

However, sustainability depends on:

• Continued fiscal consolidation
• Improved revenue mobilization
• Stable FX inflows
• Avoiding excessive rollover dependence

Without structural fiscal adjustment, repeated buybacks risk shifting maturities rather than reducing debt vulnerabilities.

Fuel Prices & Inflation Outlook

Fuel prices declined for the second consecutive month:

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

Crude oil prices declined 10.6% year-on-year to USD 65.5 per barrel.

Combined with exchange rate stability, this supports:

• Contained inflation expectations
• Lower input costs for businesses
• Improved consumer purchasing power

We expect inflation to remain within the CBK’s 2.5%–7.5% target range in the near term.

Fixed Income Outlook

The current fixed income environment is characterized by:

• Strong Treasury Bill demand
• Gradual yield compression
• Improving liquidity conditions
• Stable exchange rate
• Strengthening FX reserves
• Active liability management strategy

In the near term, we expect:

• Continued strong domestic demand for government securities
• Further mild downward pressure on short-term yields
• Stable interbank conditions
• A cautious but accommodative MPC stance

However, fiscal sustainability remains the key medium-term variable, particularly given the high debt service-to-revenue ratio.

The balance between liquidity support and disciplined fiscal management will determine the trajectory of domestic yields and sovereign risk pricing going forward.