Bond turnover hits Sh401bn as NSE investors eye high returns
A Nairobi Securities Exchange staff serves a client at the bourse. PHOTO | FILE
What you need to know:
Trading in fixed-income investments 42 per cent higher than during the first 11 months of 2015.
Bond turnover at the Nairobi Securities Exchange (NSE) in the first 11 months of the year hit Sh401.3 billion as investors continue to favour fixed-income investments against equities over higher returns.
Banks have also raised their holdings of government securities following the rate cap on customer loans, substantially buying bonds in the secondary market.
The bonds turnover is 42 per cent higher than that reported for a similar period in 2015, when investors had transacted securities worth Sh283.2 billion amid tight liquidity in the market.
The higher turnover in bonds is in contrast to the equities market, which is on track to deliver the lowest annual turnover since 2012.
“With the fall in interest rates following the cap law, there has been more value in trading bonds instead of holding onto them, due to the inverse movement of the value of bonds and interest rates,” said Sterling Capital head of research Eric Munywoki.
“Liquidity has also improved this year compared to 2015, thus boosting the capital available to put in fixed-income investments.”
This year, capital has flowed into the fixed-income segment as opposed to equities, where government securities interest rates are averaging between eight and 13 per cent while the NSE 20 and All Share indices are 20 per cent and 6.2 per cent down respectively year-to-date.
In the first 11 months of the year, the total traded turnover for equities at the NSE stood at Sh140.7 billion, compared to Sh194.3 billion in the same period in 2015.
Banks by redirecting their assets are also contributing to the higher trading in government securities at the secondary market, following the capping of customer loans at 400 basis points above the prevailing Central Bank Rate (currently 10 per cent) starting last September.
“As banks react to the rate cap, they have directed a lot of resources to government securities,” said Mr Munywoki.
The bonds market is overwhelmingly dominated by local investors who account for 94 per cent of trades as opposed to six per cent for foreigners. The trades mainly come from banks, pension fund managers, asset managers and insurance firms.
On the other hand, the equities market has this year been dominated by foreign traders, who have accounted for about 67 per cent of the traded turnover.
For market intermediaries, the higher bonds turnover can offer some relief — albeit small and reserved for a few of them — to what is likely to be a bleak year in brokerage commission earnings due to the lower equities turnover.
Stockbrokers earn a commission of 0.035 per cent per bond transaction, be it a buy or a sell, meaning that the industry has earned Sh281 million in commissions from bonds without accounting for any discounts they may have offered customers.
Bond trades are, however, concentrated among a few big players in the market, with Kestrel capital, SBG Securities, Faida Investment Bank, Sterling Capital and Standard Investment Bank accounting for up to 80 per cent of total trades.
PAYE Tax Calculator
Note: The results are not exact but very close to the actual.
