The infrastructure bond auctioned in February at an interest rate of 18.4607 percent is now trading at a premium of just over one percent on the Nairobi Securities Exchange (NSE), signalling reduced demand for the paper which had previously sold at a premium of up to six percent.
NSE data shows that the bond fetched a price of 101.2618 on Monday, a sharp contrast from 106.17 on February 26.
This means that a holder of the paper with a Sh1 million face value would sell it at just Sh1,012,618 in contrast to a higher price of Sh1,060,000 on February 26.
Infrastructure bonds, which are usually tax-free, are a darling of investors in the secondary market who pay a premium to accumulate the papers and offset losses incurred in the high price from tax savings.
Analysts note that the demand for the paper has tapered recently based on a number of developments including a sovereign ratings downgrade which has resulted in investors shrugging the paper in anticipation of higher yielding papers coming into the market from future auctions.
“Broadly, there has been a number of developments since the bond’s listing including a ratings downgrade which lead to an elevation of risk perception among investors who expect the high-interest rate environment to persist resulting in the issuance of more attractive papers in spite of the Central Bank of Kenya (CBK) moving to nudge interest rates downwards,” noted Ronny Chokaa, a senior research analyst at AIB-AXYs Africa stock brokerage.
Bonds traded in the secondary market usually see their prices fluctuate depending on supply and demand, changes in interest rates and news about the financial health of the issuer.
Moody’s ratings downgrade on Kenya for instance caused jitters among investors who anticipated that the sovereign would struggle to raise new funding from the domestic market, causing yields on both future primary bond auctions and their subsequent listing to rise.
The anticipation of a bond listing with a return greater than the February bond saw the demand for the paper dipping, driving down the price.
The price of the infrastructure bond, which represents NSE's most attractive fixed income issue, could however edge higher in coming months after the CBK successfully surpassed its target of raising Sh50 billion this month from two reopened IFBs at rates below February’s issue, signalling less pressure on government yields.
As a result, the February infrastructure bond is highly attractive to buyers at its current price even as sellers are likely hesitate from disposing of the paper in anticipation of a future higher premium.
“The bond’s price certainly tilts the paper from a seller's claim to a buyer's claim and is attractive to buyers looking to accumulate the IFB,” added Mr Chokaa.
Investors in the August reopened infrastructure bonds fetched a return of 18.2989 percent for the 6.5- year paper and 17.7279 percent for the 17-year with both yields being below return on February’s IFB.
