Market shifts signal shake-ups in portfolio mix

“The infrastructure bond offers incentives such as tax exemptions and the fact that the proceeds will be used for infrastructural development and not typical state expenditure augurs well for investors,” said Mr Kihanda.

The CBK is issuing a Sh31.6 billion infrastructure bond this month with the proceeds to be used for road construction, power generation and improving water supply.

In its note, Sterling Investment Bank indicates that the new issue may lead to increased activity though there is a good chance of it sucking liquidity in the market, considering the size of the issue.

“We have observed subdued activity levels since the announcement of this issue as most investors are consolidating funds to participate in the issue”.

However, with coupon rates of six per cent, some market players indicate that the low yields may deter investors from locking in their funds for the duration.

The bond has a nine-year maturity period.

Financial analysts indicate that the rate of return on the bond may dampen the demand despite the recent overwhelming interest on such long term debt instrument.

Coupon rate

“The coupon rate could prove a challenge as investors may not want to tie their funds for such a long duration as they wait for returns,” said Job Kihumba of Standard Investment Bank.

Given that the funds take time to be released to the general economy, Mr Kihumba indicates this will put pressure on the interest rates, causing a further upward movement.

“The funds absorbed from the bond takes time to be released as they are meant for development expenditure and this may destabilise the market with the potential of further upward swing in interest rates,” said Mr Kihumba.

Mr Kihumba reckons that the bond is likely to suck substantial funds from the money market which may put pressure on interest rates in the short to medium term.