Vibrant bond market lifts brokers’ earnings

The vibrant trading in bonds in the past eight months has seen stockbrokers grow their commissions more than three times over the period compared to last year and looks set to up the battle for fixed income traders.

Data from the Nairobi Stock Exchange (NSE) shows that trading in bonds stood at Sh361 billion in the eight months to August compared to Sh118 billion in the same period last year.

This saw brokers earn commissions of Sh145 million over the period compared to Sh47 million from the secondary bond market--trading of government and corporate bonds at the NSE.

The commissions are set at a maximum of 0.04 per cent of the traded amount, but clients can negotiate for lower commissions.

Much of the growth in the secondary bond market emerged from May on increased investor interest as returns from the sale of government securities at the primary market dropped to record levels and equities began to post sluggish returns, according to analysts at Standard Investment Bank.  

“There has been increased investor appetite in the secondary bond market since it’s offering better yields than the equities and primary bond market,” said an investor brief from Standard Investment Bank.

The build-up of cash in the economy and scarcity of investment opportunities has seen the 91-day Treasury bill dip from 7.3 per cent in September 2009 to 2.2 per cent at present.

The double digit growth that gripped the bourse in the first five months of the year has since reversed, triggering a shift in investors’ portfolio with the secondary bond market a major beneficiary.

The buoyant trading in bonds combined with trading in shares in the first half of the year has helped stockbrokers and investment bankers move to the profit zone after announcing losses last year.

In 2009, the market intermediaries reported a combined loss of Sh275 million.

No broker announced losses in the six months to June 2010.

The vibrant trading in bonds is set to lift the earnings of firms such as Kestrel Capital and Standard Investment Bank, which have in recent years beefed up their fixed income trading desks that have made them the biggest players in the bonds market.

This business segment is becoming important for the capital market intermediaries now that the equities market is recording sluggish trading.

Interest in shares has waned since June on profit taking, mostly from foreign investors who had bought undervalued shares in the five months of the year, and sluggish movement of shares that has kept away speculators. 

The benchmark NSE-20 index—which tracks the performance of blue chip firms— has gained 2.9 per cent since July.

This pales in comparison to a return of 33.6 per cent in the six months to June 2010. 

The number and value of shares traded at the NSE has also dropped in the wake of the August 4 referendum on the Constitution whose successful conclusion was expected to spur increased investor interest on the equities market.

The number of shares traded has dropped from an average of 50 million shares before the vote to an average of 15 million shares.

The daily turnover of shares now ranges between Sh350 million and Sh200 million compared to Sh550 million and Sh750 million before the vote --leaving stockbrokers with reduced commissions and turning the bond market into the new profit driver.

This looks set to intensify demand for bond traders as the market intermediaries race to grow and defend their profits—setting the stage for a battle for talent.

Job Kihumba, executive director at Standard Investment Bank, reckons that the deepening of the bond market could cause scarcity of bond dealer-analysts.

Skilled bond traders and analysts are few given the complexity of bond trading relative to that of the equities market.

“The bond pricing mechanism is usually a complex one and that is where the competitive edge normally is,” Mr Kihumba says.

“However, if the bond market becomes very vibrant than it is currently, then we are likely to experience a shortage of staff who can do the dealing and analysis,” he added.

The two-year poor show of the NSE to 2009 paved the way for increased bond trading as fund managers diversified their portfolios to cushion themselves from the volatile equities market. 

The NSE returned negative returns in 2008 and 2009 because of the weak global and local economies and confidence crisis due to fraud and effects of the 2008 post-election turmoil in Kenya.