May bond sales set for record low as tight liquidity bites

What you need to know:

NSE data for the first three weeks of May shows total bond turnover of Sh12.97 billion.
Last week, the bond market was downbeat with the weekly sales at a measly Sh1.44 billion.

Bond turnover at the Nairobi Securities Exchange (NSE) has contracted sharply this month as the market reels from tight liquidity in the money market.

NSE data for the first three weeks of May shows total bond turnover of Sh12.97 billion setting the stage for a second month of low sales following the Sh25 billion recorded in April.

The turnover last month represented the lowest total since December 2013. Average monthly turnover for the first three months of the year was Sh43.1 billion. Last week, the bond market was downbeat with the weekly sales at a measly Sh1.44 billion, meaning traders dependent on commission are headed for a tough times.

“Trading in the secondary market is curbed by tight liquidity in the money market…bond turnover has remained subdued,” said Genghis Capital analyst Vinita Kotedia in a fixed income market note on Monday.

Fixed income analysts say the subdued trading in the secondary bonds market will persist during the tight liquidity, which has come as Central Bank of Kenya (CBK) pursues a tighter monetary policy in light of the shilling’s depreciation. In the year-to-date bond sales lag the comparable period of 2014 according to NSE data.

Turnover to the end of May 2014 stood at Sh199.5 billion, while the year to date turnover for 2015 stands at Sh167.7 billion— with only a week left in May.

READ: NSE records low bonds trade in March

According to CBK, the interbank lending market—an important indicator of the liquidity levels— has also been constrained, leading to the interbank or overnight rate rising to a nine-month high of 12.06 per cent as at close of business last Friday.

“The money market was relatively tight during the week ending May 20, 2015, on account of payment of taxes and net issuance of open market operations (OMO) securities.

Reserve money averaged Sh342.1 billion during the week and was Sh2.1 billion below target,” said the CBK in its weekly bulletin.

Given that the shilling remains under pressure, analysts expect the regulator to continue with the liquidity mop-up to smooth exchange rate volatility and discourage damaging speculation in the forex market.

CBK has the option of selling dollars directly into the market as a tool for reining in exchange rate volatility, but its use is limited by the need to protect precious foreign exchange reserves, leaving liquidity mop-ups as the primary method of currency support.

The government is however coming to the end of its fiscal year, which would normally usher in a rise in spending as ministries and departments look to close out their allocations.

Such spending would normally add to the liquidity in the market, thus offering reprieve to the secondary bonds market.

“However, this is unlikely due to CBK’s increased activity in OMO mopping up money market liquidity,” Kestrel Capital head of fixed income Alexander Muiruri said.