Investors tend to shun trading bonds in times of rising interest rates, because higher rates lower the price of a bond. PHOTO | FILE
The secondary bonds market at the Nairobi Securities Exchange (NSE) opened the year on a slower note compared to 2015, the adequate liquidity in the money market notwithstanding.
Investors instead bid heavily for primary Treasury bills which indicates a bias towards short-term securities due to uncertainty over interest rates.
NSE data shows that in January, bond turnover stood at Sh21.6 billion, which is 44 per cent lower than the turnover of the corresponding month last year. The activity was flat compared to December’s turnover of Sh21.9 billion.
Ideally, the turnover in the secondary market should have benefitted from the higher liquidity in the market which has been supported by government payments, redemption of government securities and Open Market Operation (OMO) maturities.
Investors however tend to shun trading bonds in times of rising interest rates, because higher rates lower the price of a bond. This locks in those wishing to exit, negatively affecting the liquidity of the market.
“Investors are treading cautiously as rates in the market remain volatile. However, a slightly lower inflation rate (7.78 per cent in January 2016 vs 8.01 per cent in December 2015) adds some comfort to investors,” said Genghis Capital research in a fixed income note last week.
During the first week of January, the market recorded two sessions during which there were no bond trades, following a slump in activity that had carried over from the festive period.
Investors in the secondary market have largely been trading on the two-year and ten-year bonds issued in January, attracted by higher yields on these two papers compared to the previously issued bonds.
The popularity of primary issues in the market stood out in January, coming from investors who were looking for high interest returns on the assumption the government would be desperate for funds to plug its wide budget deficit.
CBK data shows that since the beginning of January, the 91 day Treasury bills have had bids of Sh48 billion against offers of Sh16 billion, representing a subscription rate of 300 per cent.
The 182-day T-bills have had bids worth Sh69.7 billion over the same period against total offers of Sh30 billion, The 364-day paper has seen bids worth Sh32.9 billion also against Sh30 billion on offer.
However, the high bid rejection rate of 40 per cent on these primary offers by the Central Bank of Kenya has the potential of turning back capital towards the secondary market, especially with the interest rates on T-Bills starting to come down after several weeks of steady growth.
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