Central Bank of Kenya Governor Kamau Thugge has dismissed concerns that climbing Treasury bill yields could weaken the link between the policy rate and what commercial banks charge borrowers.
Speaking after the latest Monetary Policy Committee meeting, Thugge pointed to a tightening convergence between the interbank rate and the Central Bank Rate as the reason the transmission mechanism still holds.
Why the interbank rate now tracks the policy rate
CBK has spent the past several months narrowing the gap between the Kenya Shilling Overnight Interbank Average Rate, known as KESONIA, and the Central Bank Rate. That alignment, Thugge argued, gives the CBR a more direct route into commercial lending rates, regardless of what happens in the Treasury bill market.
The numbers back him up, at least for now. The CBR sits at 8.75 percent. The 91 day Treasury bill yield closed at 8.782 percent on August 10, while KESONIA stood at 8.7502 percent on August 12. The three rates are separated by fractions of a percentage point, a gap CBK considers close enough to call converged.
“I don’t think that this affects the transmission because of the way we are pricing what is now the convergence between the CBR and KESONIA,” Thugge said.
He added that future rate decisions should flow through cleanly.
“When the time comes to either raise the CBR or lower the CBR, KESONIA will move in line with the CBR, and that will translate directly to either higher or lower commercial bank interest rates.”
Banks are feeling the squeeze on margins
Thugge’s comments land at an awkward moment for lenders. Kenya has moved through a prolonged easing cycle, and banks are watching their margins narrow as a result. CBK data puts the average lending rate at 14.38 percent in June, against an average deposit rate of 6.84 percent.
Thugge conceded that deposit costs have started climbing, a sign banks are competing harder to hold onto customer funds. Even so, he maintained that lenders are far from squeezed dry. The spread between lending and deposit rates still sits above seven percentage points, well ahead of the historical average of roughly five points. Banks, in other words, have room to absorb rising deposit costs before their profitability comes under real pressure.
A narrower corridor, a clearer signal
Much of this convergence traces back to a technical change CBK made in February, when it narrowed the interest rate corridor around the CBR from 75 basis points to 50 basis points. The move was designed to sharpen monetary policy transmission by pulling KESONIA closer to the policy rate, and the data suggests it has worked.
That shift is already reshaping how banks price loans. According to CBK, 47 percent of lenders now use the CBR as their base rate, while another 34 percent blend the CBR with KESONIA. Together, that means more than eight in ten banks price loans off a benchmark CBK can move directly, rather than off rates set purely by market appetite for government paper.
Treasury bill yields have not lost their relevance, though. Banks still weigh government securities against private sector lending when deciding where to park funds, and government paper carries far less risk than a business loan. That tradeoff could keep credit growth to the private sector slower than CBK would like, even as it insists lower lending rates remain a core goal of its easing cycle.
Investors keep piling into short dated government paper
The appetite for Treasury bills has stayed strong through the first half of 2026. Overall subscription reached 155.9 percent, up from 154.5 percent in the same period last year. The 91 day paper remained the clear favorite, pulling in bids worth Kshs 973.1 billion against an offer of Kshs 624.0 billion, an oversubscription rate of 279.2 percent, itself an increase from 224.8 percent a year earlier.
Longer dated bills told a mixed story. The 364 day paper drew a subscription rate of 197.9 percent, up from 191.6 percent in H1 2025. The 182 day paper lagged well behind at 64.7 percent, down sharply from 89.3 percent the year before, suggesting investors are gravitating toward the shortest and longest ends of the curve while leaving the middle underweight.
Yields moved lower across the board. The 364 day, 182 day and 91 day papers fell by 1.7, 1.1 and 0.9 percentage points respectively, settling at 8.7 percent, 8.0 percent and 7.9 percent, down from 10.4 percent, 9.1 percent and 8.8 percent a year earlier. Despite continued heavy government borrowing, robust demand has kept yields stable rather than pushing them higher. The government accepted Kshs 771.9 billion of the Kshs 973.1 billion in bids received, an acceptance rate of 79.4 percent, down from 85.4 percent in H1 2025.
Bond issuance stayed conservative in the first half
Unlike the bill market, the bond calendar was quiet in the first six months of the year. CBK issued no new Treasury or infrastructure bonds during H1 2026. Instead, it relied on reopening eighteen existing bonds and running one tap sale, together targeting Kshs 460.0 billion. Investors responded well, submitting bids worth Kshs 781.1 billion against that target, a subscription rate of 169.8 percent.
Results: reopened infrastructure bonds draw strong demand
CBK has now published results for the three infrastructure bonds it reopened in August, IFB1/2019/016, IFB1/2021/018 and IFB1/2021/021, which together sought to raise Kshs 150.0 billion. All three attracted bids well above target, with total demand across the trio reaching Kshs 460.4 billion against the combined offer, a blended performance rate of 307 percent.
The 91 day comparison is not quite apples to apples here since these are long dated bonds, but the individual results still stand out. IFB1/2019/016, with 9.3 years left to maturity, drew bids worth Kshs 166.2 billion and posted a performance rate of 110.81 percent. CBK accepted Kshs 112.6 billion, split between Kshs 71.0 billion in competitive bids and Kshs 41.6 billion in non competitive bids, at a weighted average accepted rate of 12.1960 percent against a coupon of 11.75 percent.
IFB1/2021/018, running 12.7 years to maturity, pulled in Kshs 154.9 billion in bids for a performance rate of 103.27 percent. The government accepted Kshs 105.5 billion at a weighted average rate of 12.6877 percent, against its 12.67 percent coupon.
IFB1/2021/021, the longest of the three at 16.2 years to maturity, saw comparatively softer demand, with bids of Kshs 139.3 billion translating to a performance rate of 92.85 percent, the only one of the three to fall short of full subscription. CBK still accepted Kshs 93.9 billion, at a weighted average rate of 13.0520 percent against a 12.737 percent coupon.
Across all three bonds, the bid to cover ratio held steady at 1.48, and the government booked Kshs 312.0 billion in total accepted bids. Of that, Kshs 118.1 billion will cover redemptions, leaving Kshs 193.9 billion in net new borrowing, according to CBK Director of Financial Markets David Luusa, who signed off the results on August 12.
What comes next for bond investors
CBK has already flagged its next move: a switch auction worth Kshs 15.0 billion, letting holders of FXD1/2012/15 and select Treasury bills swap into FXD4/2019/010 as part of the government’s debt liability management strategy. The destination bond carries a fixed coupon of 12.28 percent and 3.23 years to maturity. The offer opened July 30 and closes August 24.
Taken together, the strong appetite for both bills and the reopened infrastructure bonds suggests investors still see government paper as the safer bet in a market where lending rates remain elevated and credit risk in the private sector has not gone away.
For Thugge, that is the dynamic he needs to manage. He wants cheaper credit to reach businesses and households, but he also needs a market willing to fund the government’s borrowing plans. Whether the CBR and KESONIA convergence he described can keep both goals moving in the same direction will become clearer the next time the Monetary Policy Committee meets to decide where the policy rate goes from here.
