The six-month Treasury bills rose to 15.364 percent from 15.287 percent previously while the yield on the 2-year Treasury bond rose to 16.526 percent from 13.897 percent at the last auction in September, central bank said in a statement.

Both auctions drew very weak demand, with the Treasury bills sale getting a 12 percent take-up for the 3 billion shillings ($29.78 million) that was offered and the bond 22 percent for the 10 billion shillings on sale.

"Liquidity in the market is so tight right now and banks stayed away. Most of the guys that were for the papers are insurance firms and fund managers," said Mercy Njoroge, a trader at Tsavo Securities.

Market players said commercial banks prefer to lend at better rates on central bank's repurchase agreements that it has been using to mop up liquidity and through the interbank market.

"The 22 percent subscription rate was expected because the central bank has been mopping up liquidity, so most banks did not have the liquidity to buy this paper," said Robert Gatobu, a trader at Bank of Africa.

"If you got it (bond) at 16 percent, yet CBK has been mopping up liquidity at 20 percent, you have already posted a loss."

Kenya's central bank tightened policy to combat rampant inflation and extreme volatility in the exchange rate, and traders said borrowing costs are likely to rise further when rate setters next meet on Nov. 1.

Next week the bank will offer for sale 91-day Treasury bills worth 4 billion shillings and 182-day Treasury bills worth 3 billion shillings.

Copyright Reuters, 2011