The CBK, on behalf of the government has put on offer a new issue 5 year bond, seeking to raise KES 20 Billion. The proceeds are all for budgetary support, as Treasury continues to make headway with meeting its now reduced domestic borrowing target. Domestic borrowing more than halved: Fiscal year 2015/16’s initial domestic borrowing target of KES 230 Billion has more than halved following the government’s decision to borrow externally. A KES 80 Billion syndicated loan form 3 international lenders (Citi, Standard Bank and Standard Chartered) is to be followed up by issuance of a Sukkuk bond in econd Half of this fiscal year. The decision to borrow externally was almost under duress but a masterstroke, given the spike in short term rates, which would have worsened as Treasury increasingly fell behind on its borrowing schedule. Significant progress has been made with KES 102 Billion borrowed in the 2 months to 13th November as per the CBK Weekly Bulletin, after literally no borrowing in Quarter 1. Spike in short term rates proves short-lived: Treasury’s decision to issue a 5 year bond with a market-determined coupon so soon after the recent normalization of short term rates points to its confidence that interest rates should remain low. The yield curve is now back to being fla7ish after suddenly inverting in Q1 of FY15/16, the root cause of which was the tight liquidity environment employed by the CBK to cushion the currency. But given the subsequent appreciation of the KES to 101-102 levels to the USD, the CBK has since relaxed on this. This was achieved by not offering an a7ractive Repo rate relative to the higher T-Bill rates, enabling a shift in focus to the la7er hence supporting new borrowing. Shilling not out of the woods yet: .The increase in liquidity, which is being encouraged by CBK, even to the point of introducing reverse repos after nearly 24 months, might undermine KES stability. Its recent appreciation appears to have dissuaded speculation against it, resulting in capital inflows which have helped offset the impact of a strained current account deficit, reported as 10.7% as at July 2015. Expected Yield: The YTM on the 5 year was c.13.33% last week. We however expect a bidding range of 12-12.50% given the increased liquidity presently which has seen significant over-subscriptions in recent auctions. As a result, short term rates have significantly come-off, as seen in the yield curves overleaf.