February infrastructure bond shines in trading


Nairobi Securities Exchange. FILE PHOTO | DIANA NGILA | NMG

An infrastructure bond sold by the government this month is trading at a six percent premium in the secondary market on the Nairobi Securities Exchange (NSE), signaling strong demand by investors drawn the higher tax-free returns.

NSE data shows that the infrastructure bond sold on February 14 fetched a price of Sh106.17 in yesterday’s trading session to its Sh100 par price.

Analysts note the paper has attracted an outsized demand in the secondary market with buyers being largely willing to meet a greater premium to buy the bond.

“There is such a high demand for the paper in the secondary market and the bond has been commanding premium which buyers are more than willing to pay,” noted AIB-AXYs Africa Research Analyst Stacy Makau.

The six percent premium means that a holder of the infrastructure bond with a Sh1 million face value is selling the paper at Sh1,060,000.
In contrast, a buyer of the paper is locking in a lower yield to maturity with the six percent premium on price suggesting a yield to maturity of between 15.87 percent and 17 percent.

Bond prices have an inverse relationship to yields with a premium on price matching up to a lower yield to maturity- rate of return for the purchased bond. The tax-free nature of infrastructure bonds, however, implies that investors are willing to accept a lower return while offsetting the loss from tax-savings.

The majority of infrastructure bonds listed for trading on the NSE trade at premiums to par prices implying the high preference for tax-free instruments by investors and contrast to discounts in conventional bonds whose prices are under water from rising interest rates.

“Most investors and the people advising them will go for infrastructure bonds in the secondary market due to their tax-free status,” added Ms. Makau.

The value of trading on the bond at the bourse yesterday stood at Sh86.1 billion compared to Sh55 million on Monday.

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