Secondary bond trading turnover has significantly slumped as investors seek to avoid losses arising from the impact of higher interest rates on listed government securities bought earlier at lower rates.
The rising interest rates on bonds listed at the Nairobi Securities Exchange (NSE) have had the effect of cutting bond prices, exposing investors to losses from the disposal of the treasuries ahead of their maturity.
Subsequently, investors have opted to keep their bonds, holding the papers to maturity.
“Secondary bond activity will remain relatively low in the near term as investors avoid selling their holdings at lower prices due to rising interest rates,” analysts at Sterling Capital stated in a fixed-income report.
According to data from the NSE, the total value of bonds traded in the second quarter of 2023 fell by 9.3 percent to Sh147.4 billion from Sh162.5 billion in the first quarter to March.
On a year-over-year basis, secondary bond turnover has declined by 24.6 percent from Sh195.6 billion in the second quarter of 2023.
Interest rates on new auctions of government debt securities have been rising as the National Treasury seeks to plug the budget deficit in a market where investors are demanding compensation for the risks of high inflation and weakening of the Kenya Shilling.
The bonds most at risk of being sold at a loss are those whose interest rate trails the returns on new papers.
Recent bond auctions have seen the interest rate on medium-term bonds rise above the 16 percent mark, hurting the valuation of similar securities which were bought with lower rates of between 10 percent and 12 percent.
The discount seen when selling bonds in the secondary market is meant to bring the returns of the securities to match the prevailing interest rates.
Lower prices raise the yield that buyers of the securities will earn going forward while premium prices have the opposite impact.