Weekly Fixed Income Update – 19th December 2025

Money Markets: Treasury Bills (Primary Auction)

After ten consecutive weeks of oversubscription, Treasury bills were undersubscribed for the first time, with the overall subscription rate falling sharply to 67.3%, down from 135.7% the previous week. This reversal points to a temporary cooling in investor appetite, likely reflecting seasonal liquidity pressures ahead of year-end and a degree of investor fatigue following sustained heavy issuance.

Investor preference for short-term paper weakened notably. The 91-day T-bill attracted bids of Kshs 3.6 bn against an offer of Kshs 4.0 bn, translating to a subscription rate of 89.2%, significantly lower than 187.7% the previous week. Demand for the 182-day paper declined further to 13.9%, from 22.4%, while the 364-day paper saw subscriptions fall to 111.9% from 228.3%, indicating broad-based moderation across the curve.

Despite the subdued demand, the government maintained a high acceptance discipline, accepting Kshs 16.14 bn out of Kshs 16.15 bn received, representing an acceptance rate of 99.96%.

Yields recorded a mixed but generally downward bias, consistent with easing liquidity conditions. The 182-day yield remained unchanged at 7.8%, while yields on the 364-day and 91-day papers declined marginally by 0.7 bps and 0.5 bps to 9.23% and 7.77%, respectively. The yield compression suggests that despite weaker demand, the government continues to benefit from a relatively benign rate environment.

Liquidity Conditions

Liquidity in the interbank market eased during the week, supported by government payments that outweighed tax remittances. The average interbank rate declined meaningfully by 21 bps to 9.0%, from 9.2% the previous week. Trading volumes softened slightly, with average interbank volumes declining by 12.7% to Kshs 11.3 bn, from Kshs 12.9 bn, reflecting reduced market activity as the year-end approaches.

Kenya Eurobonds

Kenya’s Eurobond yields continued their downward trajectory, signaling improving external investor sentiment. The 12-year Eurobond (issued in 2019) recorded the largest decline, with yields falling by 42.8 bps to 7.4%, from 7.8% the previous week. The compression in yields reflects easing global risk premiums, sustained confidence in Kenya’s external buffers, and improved perceptions around near-term refinancing risk.

Foreign Exchange Market

The Kenya Shilling strengthened further during the week, appreciating by 16.2 bps against the US Dollar to close at Kshs 129.0, from Kshs 129.2 previously. On a year-to-date basis, the shilling has appreciated by 27.2 bps, a marked improvement in stability compared to the sharp depreciation experienced in prior years, though still well below the 17.6% appreciation recorded in 2024.

Kenya’s foreign exchange reserves increased marginally by 0.6% to USD 12.1 bn, equivalent to 5.3 months of import cover, comfortably above the statutory minimum of 4.0 months and providing a strong buffer against external shocks.

Weekly Highlights

Draft 2026 Budget Policy Statement (BPS)

The National Treasury released the Draft 2026 Budget Policy Statement, outlining the government’s fiscal and economic priorities under the Medium-Term Expenditure Framework (FY 2025/26–2027/28). The document underscores a continued expansionary fiscal stance, anchored on growth optimism but accompanied by rising financing pressures.

Key projections indicate that total revenue (including grants) is expected to grow by 5.0% to Kshs 3,535.8 bn in FY’2026/27, supported by modest growth in external grants. However, total expenditure is projected to rise faster, by 8.7% to Kshs 4,641.9 bn, driven primarily by higher recurrent spending, which continues to dominate at 73.9% of total expenditure.

As a result, the fiscal deficit is projected to widen to Kshs 1,106.1 bn (5.3% of GDP), up from 4.7% in FY’2025/26. Financing of this deficit will rely heavily on domestic markets, with net domestic borrowing projected at Kshs 1,006.6 bn, reinforcing concerns around crowding out and sustained pressure on domestic yields.

GDP growth is projected at 10.1% nominal growth, providing some fiscal headroom; however, the rising deficit trajectory and growing reliance on domestic borrowing underscore persistent fiscal risks.

November 2025 Exchequer Performance

The Exchequer data for November 2025 highlights ongoing revenue underperformance and elevated debt servicing pressures. Total revenue collected reached Kshs 958.4 bn, equivalent to 83.5% of prorated targets, while total financing exceeded prorated estimates by 21.7%, driven largely by domestic borrowing.

Notably, public debt servicing costs reached Kshs 865.8 bn, accounting for 90.3% of actual cumulative revenues, underscoring the rigidity of fiscal obligations and limited room for discretionary spending. Domestic borrowing remains significantly above target, reinforcing the government’s dependence on the local debt market.

Fuel Prices (December 2025 – January 2026)

EPRA maintained fuel prices unchanged for the December–January pricing cycle, with Super Petrol, Diesel, and Kerosene retailing at Kshs 184.5, Kshs 171.5, and Kshs 154.8 per litre, respectively. While the landing cost of Super Petrol declined by 4.3%, higher landing costs for Diesel and Kerosene continue to exert upward cost pressures, partially offset by exchange rate stability.

Outlook

Looking ahead, fixed income markets are likely to remain influenced by seasonal liquidity dynamics, evolving fiscal signals from the Draft BPS, and sustained domestic borrowing requirements. While near-term yields may remain contained by easing liquidity and currency stability, the medium-term outlook continues to hinge on fiscal consolidation efforts and the government’s ability to balance growth objectives with debt sustainability.