Lower interest rates attract bond market investors

The bonds market registered the highest turnover in two years for the first three months of the year, signifying increased attraction to investors as interest rates fell.

The secondary market at the Nairobi Securities Exchange (NSE) moved Sh103 billion in bonds between January and March compared to Sh67 billion and Sh99 billion in the previous two quarters.

Since December 2011 when interest rates surged to decade-long highs, the fixed-income market has gradually improved as macroeconomic conditions — especially inflation — stabilised.

Interest rate on short-term instruments such as Treasury Bill have been falling, pushing bond turnover up. Lower interest rates increase bond yields.

“Times couldn’t be better than now. Interest rates have fallen and so people are expecting higher returns than when the rate were higher,” said Crispus Otieno, a fixed-income dealer at Afrika Investment Bank.

This month the market begun on a high note, with last week’s trading going up seven per cent to Sh13.497 billion from the previous week’s Sh12.668 billion. The month had seen Sh33 billion in total turnover by April 16.

The Central Bank of Kenya (CBK) attributed the robust turnover in the fixed-income secondary market to people targeting to buy the upcoming five-year bond.

“The strong activity may be explained by investors offloading old stock to buy the new bond on offer in the primary market,” said the CBK in its weekly bulletin released just before Easter.

Mr Otieno said the falling rates are also likely to be critical in the sale of the five-year bond that proposes to raise Sh15 billion.

The Treasury has floated the bond to raise cash for Budget support, and the coupon will be determined by the market.

“We see the coupon coming lower than in the same paper issued at the end of last year. It could be at a cutoff of 10.8 per cent,” said Mr Otieno.

According to data from Dyer and Blair Investment Bank, the two-year bonds have fallen 5.08 basis points while the 91, 182 and 364-day T-bill rates have all fallen in the week ending April 17.

READ: Why CMA wants central bank out of bonds market

The bond market has been quite active in recent years, more so after the 2009 introduction of the automated trading system that saw turnover hit a record Sh119 billion in the first quarter of the following year.

In the first quarter of 2011, Sh109 billion worth of bonds was traded, falling further to Sh99 billion on the back of volatile interest rates.

The CBK increased the policy rate towards the end of 2011 to 18 per cent to curb the fall of the Kenya shilling and arrest inflation.

The rise in the rate caused investors to shun the fixed-income market for fear of capital losses having bought the instruments at prices well above the prevailing selling prices.

The fall in interest rates as the policy rate progressively reduced from mid-2012 to 8.5 per cent for the past one year has given the bond market a positive outlook.