Bond turnover hits Sh494bn as investors cash in on high returns

The bond turnover last year rose by 9.1 per cent to Sh494 billion with returns for most of the issues rising.

Sales for the fixed-income market marked the second-best year ever, with 2012 an historic high at Sh567 billion traded.

In 2014, investors were encouraged by returns, which were positive for 47 or 81 per cent out of the 58 government bonds that were listed. Only 11 bond issues had a negative return, according to data compiled by Nairobi-based Kestrel Capital (East Africa).

Bond returns are calculated as changes in price plus coupon payments given in the course of the year. Coupon payments are made twice a year for Kenyan bonds.

In 2013, the bonds turnover stood at Sh453 billion after falling from the previous year.

Analysts attributed the increased activity in the bond market to expectation of lower interest rates or yields.

“There was good activity in the bond market because of expectations of low interest rates, especially in the two to three months towards the end of the year,” said Vimal Parmar, head of research at Nairobi-based corporate finance and investment advisory firm Burbidge Capital.

Mr Parmar said this year would also witness high turnover in the fixed-income market if the interest rates are as low as the market expects.
When yields expressed as interest rates go up, bond prices rise.

READ: Brokerage firms to gain as bond turnover up 17pc

According to Kestrel Capital, the 10-year bond issues were the most traded in the course of the year taking 27 per cent of the turnover, followed by the five-year paper at 26 per cent and the 15-year bonds at 18 per cent.

Joshua Otiende, research analyst at ABC Capital, said the bond market rallied towards the end of the year when the yields were also falling, thereby pushing prices up.

“In the early part of the year (2014), the returns were low, so few people were taking up bonds, but as the year approached the end, the market became quite attractive and there was a spike in the turnover,” said Mr Otiende.

In the over-the-counter (OTC) market, which constitutes trades that are made directly rather than going through the Nairobi Securities Exchange, treasury bills worth Sh29.84 billion were transacted.

The OTC or the second market for treasury bills was opened in April last year as a way to increase liquidity of the instruments which are largely held by commercial banks.

Financial institutions suffering from liquidity constraints can easily trade the short-term instruments and get cash.

The banks, therefore, are able to avoid having to go to the interbank market or the Central Bank of Kenya discount window that offers them money at punitive lending rate.

The discount window has a mark-up above the policy rate, also called the Central Bank Rate.