Volatility hits Kenya’s $2bn Eurobond close to maturity


Eurobonds attract a fixed rate of interest during the life of the loan.

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The price of Kenya’s maturing $2 billion (Sh306 billion) Eurobond has become volatile in secondary market trading as investors angle for a potential premium when the government settles a $300 million instalment of the bond later this month.

The 10-year sovereign bond, which was floated in June 2014 and trades on the Irish stock market, has seen its yields move up or down by more than a percentage point every week since the beginning of November.

The other five outstanding Eurobond issues, which mature between 2027 and 2048, have seen more muted yield movement of between 0.1 and 0.3 percentage points weekly.

Bond prices and yields usually feature an inverse relationship where a rise in one rate signals a decline in the other.

In the secondary market, bonds are sold for a premium or discount of their face value —the actual value or cost of the bond at its first issue.

In his November 9 State of the Nation address, President William Ruto confirmed that the government would settle the first $300 million instalment of the 2014 bond this month.

The bond’s traded yield, which had gone up by 1.4 percentage points to 15.46 percent in the week leading up to the address, reversed to fall to 12.9 percent over the next two weeks.

This sharp decline, according to analysts, shows that demand for the paper rose on account of the buyback news, pointing to expectations of a price gain for those who opt to participate in the exercise.

“Given that the amount being settled early is above 10 percent of the total value of the bond, the buyback will be done via a tender offer.

“There is likely to be a premium, therefore, to convince bondholders to participate, going by the example of a similar transaction done by Ghana recently” said Churchill Ogutu, an economist at IC Asset Managers (Mauritius).

“The market is, however, still uncertain over the finer details of the buyback, and given that the bond is also subject to the usual sentiments around short-term emerging and frontier debt, there is volatility in price and yield.”

Last week, the bond saw a 1.21 percentage point rise in yield as risk aversion to frontier and emerging bonds rose due to a globally strengthening dollar.

Overall, however, sentiment around Kenya’s sovereign debt has improved since the government outlined its buyback plan and reassured the market that it can fully service external debt obligations in the near term, partly from incoming dollar supply via loans from the World Bank and the International Monetary Fund.

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