Bond turnover surges to Sh777bn on investor demand

The demand for bonds has been driven by investor education, including through social media, and the emergence of investment clubs that take on board advice from professional investment advisors.

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The value of bonds traded in the secondary market at the Nairobi Securities Exchange (NSE) in the six months to June more than doubled to Sh777 billion, surpassing the full-year total for 2023 as investors cashed in on demand for high-paying infrastructure bonds.

In the first half of last year, investors traded Sh309.9 billion worth of bonds, while the full-year total for 2023 stood at Sh643.9 billion.

In passing the 2023 bond turnover total at the half year stage, the NSE is on track to crack the Sh1 trillion mark and eclipse the record high of Sh956.11 billion set in 2021.

The jump in bond trades also indicates that the primary market was unable to meet the full demand from investors, especially those seeking the tax-free project bonds. The last three infrastructure bond sales (June 2023, November 2023 and February 2024) raised cumulative investor bids worth Sh598 billion against a target of Sh180 billion.

Government bonds, long a preserve of banks, pension funds and other institutional investors, have increasingly grown in popularity among retail investors who have been seeking to widen their source of investment returns as assets such as equities and property slow down.

The demand for bonds has also been driven by investor education, including through social media, and the emergence of investment clubs that take on board advice from professional investment advisors.

In contrast to bonds, the equities market saw its turnover shrink by 20 percent to Sh47.5 billion in the first half of the year, largely defying higher share prices on key stocks that would have ordinarily driven trading activity.

Safaricom, Equity Group, KCB Group and EABL saw their share prices rise by between 24 and 43 percent in the period. Some of the smaller cap stock prices however remained muted, and with the market still to fully recover from a prolonged bear run, many investors have yet to see prices at which they can sell their holdings at a profit.

For market intermediaries, the lower equities turnover will further dent their already slim earnings from handling trades, but those with strong bond trading desks will recoup revenue from the significant growth in volumes.

Usually, stockbrokers and investment banks depend on commissions charged on equities and bonds transactions they handle at the NSE and, in a booming market, they can diversify their income through advisory service charges on initial public offerings (IPOs), rights issues, mergers and acquisitions.

The intermediaries earn a commission of 1.5 per cent per trade for deals worth above Sh100,000 and 1.76 percent for those below this amount. Their net commission on bonds is pegged at 0.03 percent per trade.

The NSE, Capital Markets Authority (CMA) are due a cut of 0.12 percent each out of the commission charged by the stockbrokers on equities, while the Central Depository and Settlement Corporation (CDSC) is paid 0.08 percent.

In 2023, the NSEā€™s transaction levies from equities trades fell by 6.5 percent to Sh211.09 million, while those from bonds trading declined by 18.9 percent to Sh64.4 million.

The exchange was however able to grow its net profit by 34 percent to Sh18.4 million courtesy of higher revenue from market data sales, which brought in Sh116.6 million in 2023 compared to Sh93.5 million in 2022.

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