Capital Markets

Bonds turnover rises threefold on excess liquidity

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Central Bank of Kenya. FILE PHOTO | NMG

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Summary

  • Bidders had put up a record Sh151.26 billion for the 21-year infrastructure bond, and with the Central Bank of Kenya (CBK) taking up Sh106.75 billion, they were left holding on to Sh44.5 billion in idle liquidity.
  • It is this money that then found its way into the secondary market last week, where demand was mainly on infrastructure papers.

Bonds turnover on the Nairobi Securities Exchange (NSE) rose threefold last week as investors who missed out on the September infrastructure bond sale sought to buy the securities in the secondary market.

Market data from the exchange shows that investors traded Sh40.53 billion worth of bonds last week, a 237.6 percent increase on the previous week’s volumes of Sh12 billion.

Bidders had put up a record Sh151.26 billion for the 21-year infrastructure bond, and with the Central Bank of Kenya (CBK) taking up Sh106.75 billion, they were left holding on to Sh44.5 billion in idle liquidity.

It is this money that then found its way into the secondary market last week, where demand was mainly on infrastructure papers.

“Secondary market activity soared with the interest mainly skewed towards infrastructure bonds. We expect sustained interest on the September 2021 infrastructure bond to continue during the week,” investment bank Genghis Capital said in a market report yesterday.

“With the upcoming maturity of a five-year 2016 bond as well as partial redemption of a 12-year, 2013 infrastructure paper this week, we anticipate investors will redirect funds to this bond.” Infrastructure bonds normally attract heavy demand, both in primary sales and secondary trading, due to their tax free- nature.

This month’s infrastructure bond is paying interest of 12.74 percent. For an investor to get a similar net return from an ordinary bond that attracts a 10 percent withholding tax, they would need it to carry a coupon of 14.12 percent.

The Treasury has, however not been willing to pay that much for ordinary bonds in recent issuances. A 20-year paper issued last month—almost similar tenor to the September infrastructure paper—for instance is paying interest at 13.44 percent, before withholding tax.

Investors are therefore able to get a premium from investing in the infrastructure bond, which also attracts heavy demand from foreign investors.

The lack of well performing alternative investment classes has also fuelled the demand for bonds, with equities still offering relatively lower returns.