Market Overview

Kenya’s Treasury bond market in September 2025 reflects the government’s balancing act between financing a growing fiscal deficit and managing borrowing costs in an environment of strong investor demand. The period has seen reopenings of long-dated bonds, redemption of a major infrastructure bond, heightened activity in the secondary market, and shifts in investor preference toward Treasury bills.

With a domestic borrowing target of KES 635.5 billion for the 2025/26 fiscal year and a total deficit financing need of KES 901 billion, the National Treasury and the Central Bank of Kenya (CBK) are relying heavily on bond issuance to meet funding gaps while keeping yields manageable.

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Bond Issuance and Government Borrowing

• Reopened Bonds: In September 2025, the CBK reopened several long-dated instruments—FXD1/2018/020 (20-year), FXD1/2022/025 (25-year), and SDB1/2011/030 (30-year)—with the aim of raising KES 60 billion for budgetary support.
  
• Coupon Structures:
  
  • The 20-year bond (FXD1/2018/020) carries a coupon of 13.2000%, maturing in March 2038.
  • The 25-year bond (FXD1/2022/025) offers 14.1880%, maturing in September 2047.
  • The 30-year bond (SDB1/2011/030) pays 12.0000%, with maturity in January 2041.
    
• Strategic Borrowing: By reopening bonds instead of issuing new ones, the CBK benefits from pre-set coupon rates, which helps contain government borrowing costs. Investors still enjoy stable returns, though sometimes at discounted prices depending on prevailing yields.

Overall, the government plans to borrow KES 652.8 billion domestically in FY 2025/26 to finance part of its rising fiscal deficit.

Market Dynamics

• Bond Redemption: On September 15, 2025, the Treasury redeemed a KES 15.2 billion 12-year tax-free infrastructure bond (IFB1/2013/12). The instrument carried an 11% coupon rate, marking a significant maturity in Kenya’s infrastructure financing program.
  
• Secondary Market Profits: Investors realized KES 101.4 billion in profits from bond sales during the first half of 2025, an eightfold increase compared to the same period in 2024. This surge was fueled by rising bond prices as yields declined.
  
• Declining Yields: The steady decline in Treasury bond yields has persisted into September, a sign of improved investor confidence and a more favorable macroeconomic outlook.
  
• Treasury Bill Preference: Investors are favoring the 364-day Treasury bill over shorter tenors (91-day and 182-day), seeking higher returns. The longer T-bill offers a 1.5 percentage point premium over shorter maturities.
  
• Oversubscription: The September 8 auction of the 364-day T-bill attracted KES 23.10 billion in bids against an offer of KES 10.00 billion, with a weighted average rate of 9.5790%—a clear sign of strong demand.
  
• Market Turnover: Despite overall appetite, bond turnover in the secondary market contracted by 23.76% in the week ending September 4 and by 21.0% in the week ending September 11. The slowdown highlights shifting investor strategies between long-term bonds and shorter-term bills.

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Key Developments

• Introduction of KESONIA: On September 1, 2025, the CBK launched the Kenya Shilling Overnight Interbank Average (KESONIA) index. This benchmark tracks cumulative daily interbank rates, enhancing transparency in the money markets and influencing pricing for variable-rate loans.
  
• Eurobond Yields: In the international market, yields on Kenya’s Eurobonds fell by an average of 60.6 basis points during the week ending September 11, 2025. The decline signals renewed investor appetite for Kenyan debt, likely supported by improved sentiment on fiscal management.
  
• Sustainability-Linked Bonds: Kenya, in collaboration with the World Bank, is finalizing a framework for sustainability-linked bonds. These instruments will tie external financing to measurable sustainability goals, with a particular focus on combating deforestation and expanding rural electrification. Once operational, the framework is expected to diversify Kenya’s financing sources and enhance its standing in the global green finance market.

Risks and Considerations

• Interest Rate Risk: Bondholders remain exposed to fluctuations in market interest rates. If rates rise, the value of existing bonds with lower coupons may fall. However, investors in reopened bonds may mitigate this risk through discounted purchase prices.
  
• Inflation Risk: Persistent or renewed inflation could erode the real returns on fixed coupon payments, reducing investor appetite for long-term bonds.
  
• Debt Sustainability: Kenya’s public debt has reportedly surpassed KES 12.1 trillion, raising concerns about fiscal sustainability. While lower yields and innovative financing tools provide some relief, the long-term trajectory of debt remains a critical risk for both domestic and international investors.

Conclusion

September 2025 highlights the resilience and complexity of Kenya’s Treasury bond market. On one hand, the government is successfully refinancing its obligations through bond reopenings and redeeming legacy infrastructure debt. On the other hand, risks tied to inflation, interest rates, and mounting debt levels remain at the forefront of investor considerations.

For now, the market reflects strong demand, declining yields, and growing sophistication with the introduction of benchmarks like KESONIA and planned sustainability-linked bonds. Yet, the balance between financing Kenya’s ambitious fiscal agenda and maintaining debt sustainability will continue to shape investor sentiment in the months ahead.

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