Bond market exerts pressure on interest rates

Buyers of Treasury bonds at the secondary market are getting a bargain as prices come down due to increased supply that rides on the back of a rally lasting nearly a year.

While fund managers were reported to be slowing down on buying, other investors were flocking in to take advantage of the pricing, pushing the amount of bonds bought in the past week by 131 per cent to hit Sh13.4 billion compared to Sh5.8 billion the previous week following the listing of the government’s fourth infrastructure bond.

Said Kestrel Capital in a brief: “Investors flocked the secondary market after they missed out on the primary market auction. The Central Bank of Kenya had invited bids for a Sh31.6 billion nine-year fixed-coupon infrastructure bond on behalf of the Government of Kenya.”

As a result of the lower prices, the number of Treasury bonds experiencing a rise in yields rose to 42 from 31 in the previous week, out of the 58 currently listed on the Nairobi Stock Exchange.

This was the third consecutive week that a substantial number of bonds saw their yields rise at the NSE.

The price of a bond, quoted with reference to the par of Sh100, moves in the opposite direction to the interest rates.

When the price of a bond goes down, the investor expects a higher yield (return) to maturity than when the price is higher.

Currently, all Treasury and infrastructure bonds are trading at a price range of about Sh100 per unit such as for the recently issued Sh30.5 billion infrastructure bond, and Sh164 per unit for the 15-year bond issued in 2007.

Investors are now faced with increased choices in the secondary market and the massive infrastructure bond was a major cause of more supply.

Limited supply

This means that investors do not have to scramble for limited supply of bonds that has traditionally been the main drawback in the market — causing many bonds to be under-priced.

In the past two years, bonds have become popular and institutions have accumulated significant amounts of the fixed-income instruments.

“It is a matter of demand and supply in the bond market. The prices we are seeing are a correction of the situation that obtained previously,” said Brian Muchiri, associate director at ApexAfrica Capital.

He explained that with buyers reducing, the only way is for yields to go up especially at a time when fund managers are not buying in a big way.