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Ideas & Debate

Two different tales from economists, bond yields

From left: Treasury secretary Henry Rotich, African Economic Research Consortium director Lemma Senbet and former Central Bank of Kenya governor Njuguna Ndun’gu at the launch of the Africa growth initiative flagship report in January. The continued march south in bond yields is a great reflection of improving economics. FILE PHOTO | NMG
From left: Treasury secretary Henry Rotich, African Economic Research Consortium director Lemma Senbet and former Central Bank of Kenya governor Njuguna Ndun’gu at the launch of the Africa growth initiative flagship report in January. The continued march south in bond yields is a great reflection of improving economics. FILE PHOTO | NMG 

Something strange is happening. Bonds men are saying the prospects for the economy are very good and possibly going to be very great. On the other hand, economic pundits are busy shouting Armageddon – Kenya’s rising high debt to GDP ratio and high budget deficit is scaring.

Check out this scenario: by close of 2017, the (older) 10-year Eurobond had risen to a new high, with the yield dropping to 5.67 per cent, down from 7.81 per cent in 2016.

The recent 10-year Eurobond also hit a new high, with the yield dropping to 7.11 per cent from its opening 7.25 per cent. Note: Bond prices and yields have an inverse relationship. When yields rise, bonds prices fall and vice versa.

The big question is; whom do we believe and whom do we believe not? Who’s saying the truth? And who’s going to win the war?

This is a tough call. But since no one sees the future, it’s futile to attempt. Instead, let’s turn our focus elsewhere. Let’s try to separate what the bonds outperformance is and what it isn’t.

And here there are two positions; the experts and the markets. This statement by Moody’s Investor Service aptly captures the view held by most economic experts regarding the country’s financial position.

Commenting on its recent downgrade of Kenyan Government bonds, the rating agency had this to say; “the drivers of the downgrade relate to an erosion of fiscal and rising liquidity risks…….the fiscal outlook is weakening with a rise in debt levels and deterioration in debt affordability that Moody’s expects to continue.” Put ifferently, Kenyan treasury Bonds are no safe-house.

On the other hand, a different story is being told inside the markets. That Kenya has the attraction of high-yields, political stability and an improving economy (recent PMI survey findings show an increase in business to the highest level since April 2016). In other words, the idea that Eurobonds are pricing in growth and stability is being viewed as true.

Moreover, players see yield-hungry international investors increasingly responsible for lower yields. Yield-chasers are turning to emerging/frontier market bonds as most developed markets still offer low/negative yields.

And since Africa (a frontier destination) is giving the highest sovereign Eurobond yields in the world (six per cent on average), investor interest remains high.

Oversubscriptions are the norm. So far this year, countries that have received oversubscriptions for their Eurobonds include Nigeria, Senegal and Kenya.

According to Bloomberg, African nations have sold $10.7 billion of Eurobonds this year alone, more than half the record $18 billion they managed last year and exceeding the total for the whole of 2016.

Now, if there’s anything I’ve learnt from the market is to never disagree with it. The continued march south in bond yields is a great reflection of improving economics.

Even local bonds seem to reflect this optimism - the FTSE Bond Index has rallied some four per cent since February 2017. Never mind the naysayers. Markets are always right. For this reason, the economic message the Eurobond market is sending must be viewed in that light.

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