Capital Markets

Bond sellers suffer steep discounts as interest rates rise


Nairobi Securities Exchange. FILE PHOTO | DIANA NGILA | NMG

Bond traders at the Nairobi Securities Exchange (NSE) have continued to mark sharp losses as interest rates continue to rise unabated.

According to data from the NSE, investors have discounted bonds sold in the secondary market by as much as 24.4 percent.

Holders of bonds bought earlier when interest rates were lower are forced to sell at a lower price, to bring the returns for buyers to levels matching the current high rates on new auctions of similar securities.

Read: Bond trading declines as holders avoid losses

On Thursday for instance, a bond featuring a 12.734 percent coupon (interest rate) was disposed of at Sh75.53 for every Sh100 or par value mirroring the sharp discounts on show in the bonds secondary market.

Bond prices usually have an inverse relationship to interest rates where a rise in interest rates results in lower bond prices while on the vice-versa, bond prices usually rise when interest rates fall.

Data from the Capital Markets Authority (CMA) shows that bond investors lost Sh5.1 billion from dipping bond prices in the second quarter to June as the majority of listed bonds traded at prices below par value.

Medium to long-term bonds suffered the sharpest of losses with investors likely disposing of the papers to purchase shorter-dated and higher-yielding Treasury papers at the primary market.

In the secondary market, bondholders usually sell their papers at a premium or discount to the par value where prevailing interest rates define gains or losses for the investors.

During the second quarter, bonds worth Sh152.53 billion at face value were traded at the NSE but with the traded turnover only totalling Sh147.39 billion to mirror the discounts taken.

The secondary bonds market has turned into a dumping ground for investors looking to liquidate their bond holdings for higher returns being offered through the Central Bank of Kenya (CBK) security issuances.

Interest rates on government securities have continued to rise as investors price in higher inflation levels and wider budget deficits by the government.

As such, the investors have continued to demand a premium to invest in government securities, cognizant of the exchequer’s funding pressures which will mean a higher reliance on the domestic credit market by the government.

Last week’s infrastructure bond for instance, revealed the underlying demand for higher interest rates by investors, as the auction closed with a weighted average interest rate of accepted bids hitting 17.9 percent with bids rising to as much as 18.1 percent for the 6.5-year paper.

Read: Treasury returns to short-term bond to raise Sh35bn

Shorter term interest rates represented by Treasury bills have equally swelled with the return from the 364-day paper for instance reaching 15.61 percent last week.

Given the rising interest rates environment, the National Treasury has avoided issuing long-term bonds with the view of mitigating against refinancing risks.

[email protected]