The mood in the fixed-income market has been evolving for months, and the latest bond auction has clearly confirmed this trend. Investors who follow the Treasury market closely are already aware of the current situation: when returns decline across the board, yield becomes the primary focus for everyone. This is precisely what happened in the most recent sale. Two long-term instruments were offered, yet almost all attention focused on the one offering a higher payout. The alternative’s longer maturity was irrelevant; the key factor was the annual income it produced.

The Central Bank of Kenya (CBK) invited bids aiming for KSh 40 billion. The market responded eagerly and urgently, with bids surpassing KSh 53 billion, showing investors’ willingness to commit significant capital. Of the KSh 47.1 billion ultimately accepted by the Central Bank, the 25-year bond constituted the vast majority. It drew nearly KSh 48.5 billion in offers and secured over KSh 43 billion. By contrast, the 30-year instrument garnered only a small share of the total. Investors expressed their priorities clearly.

This preference did not emerge suddenly. It has been gradually developing through a series of auctions where buyers consistently favour instruments with strong annual returns. The 30-year bond, although familiar and well-established, has recently struggled to attract enough demand in reopenings. The market appears unconvinced that an additional five years of maturity is sufficient compensation for a lower annual income. In an environment where inflation and monetary easing affect the value of future cash flows, investors are reluctant to wait longer for less.

The broader context explains much of this behaviour. Interest rates across the fixed-income market have been falling for a long time. Anyone who relies on income from Treasury bills, unit trusts, or traditional bank deposits has noticed that returns have declined noticeably. As a result, investors are searching more widely for reliable yield. Instruments that would usually attract only large institutions are now drawing attention from a broader range of investors. When safer, short-term instruments start to seem insufficient, the longer-term segment becomes increasingly attractive, provided the coupon offers enough compensation for the longer commitment.

Monetary policy has played a significant role in shaping these preferences. The Central Bank has been gradually lowering its benchmark rate since August 2024, resulting in eight consecutive reductions. The current policy rate is now 9.25%, considerably lower than the 13% recorded just a year earlier. For income-focused investors, this downward trend indicates one thing: coupons that appear attractive today might not be available tomorrow. There is a pressing need to lock in returns while the opportunity is still available.

The CBK has capitalised on the opportunity by reopening several long-term instruments in recent months. In November, for instance, a series of longer-maturity bonds attracted considerable interest. These offerings provided attractive coupons that exceeded those available on shorter-term securities. Investors responded quickly, and the total bids for the November reopenings surpassed KSh 208 billion. Although the CBK accepted only part of this amount, the substantial oversubscription indicated strong market sentiment.

Institutional investors are naturally attracted to longer-term assets. Pension funds, insurance companies, and other long-term players prefer instruments that align with their liabilities and provide predictable income. What is notable in the current environment is the increased activity from smaller investors who previously preferred short-term positions. As returns on bills and bank deposits decline, many have realised that committing to a longer maturity with a generous coupon might be the better option. The quest for yield is unifying investor behaviour across the board.

Looking ahead, this trend is unlikely to fade soon. As long as the policy environment continues to ease and short-term yields remain subdued, investors will continue to shift towards instruments that offer higher income. The 25-year bond has become the preferred option in this evolving landscape. It provides a balance of duration and payout that appeals to both cautious long-term investors and tactical buyers aiming to outperform the prevailing rate environment.

In a market where every basis point matters, investors prefer clarity over hesitation. They seek income that aligns with their expectations and are willing to commit longer-term to secure it. The pursuit of yield is now the main driver of capital in the Treasury market, and that trend is expected to persist for the foreseeable future.