First quarter bonds turnover down even as March trades rise

The secondary bond market turnover fell by 11.6 per cent for the first quarter of the year compared to 2015 but the market showed signs of recovery in March when monthly turnover rose to a two-year-nine month high.

Nairobi Securities Exchange (NSE) data shows the first quarter turnover stood at Sh113.4 billion, compared to Sh129.4 billion in quarter one of 2014. The turnover in similar quarter of last year stood at Sh71.3 billion.

The secondary bonds market has over the past one year been affected by an investor shift in focus towards the primary government debt market, where rates went up to as much as 25 per cent in October last year, while the yields on the secondary market have failed to keep up.

The uncertainty in the interest rate direction at the beginning of the year — where some analysts were projecting a rise — also shifted investors towards the short-term debt instruments as they sought to avoid being locked in to the long-term paper at lower rates which they could only exit at a loss.

READ: NSE bonds market starts year on a low note

“The NSE yield curve flattened in the third quarter of 2015, and a similar trend was observed at the beginning of 2016, as cautious investor sentiments drew up rates on the short end of the yield curve, whilst the long-end remained neglected,” said Genghis Capital in a fixed income 2016 outlook note.

Primary issue yields

The March 2016 turnover of Sh67.5 billion, however, stood out as the highest monthly total since June 2013, mainly due to higher trading on the five year, 10-year and infrastructure bonds. It represented a 168 per cent month-on-month increase from the turnover of Sh25 billion recorded in February.

The upturn in activity in the secondary market has coincided with the fall of primary issue yields, where that on the 91-day, 182-day and 364-day Treasury bills has come down to nine, 10.8 and 11.9 per cent from 11.7, 14.4 and 14.5 per cent respectively since the beginning of February.

“The turnover...increased on account of the declining yields on short-term securities making the longer dated papers more attractive. The recently issued bonds have been the top trading bonds in the secondary markets week-on-week during the period,” said Cytonn Investments in a market report at the end of March.

The decline in yields has been helped by reduced appetite for local debt after the Treasury revised downwards the borrowing target for the financial year in the budget policy statement tabled in February.

Although the secondary turnover on government bonds rose last month, Kestrel Capital data shows that corporate bond turnover dipped 41 per cent to Sh130.4 million as most bondholders of this category opted to maintain their holdings.