Capital Markets

Infrastructure bonds shine in secondary market


Nairobi Securities Exchange (NSE) on the trading floor. FILE PHOTO | NMG

The infrastructure bonds (IFBs) sold by the government this year are trading at a premium in the secondary market at the Nairobi Securities Exchange (NSE) on elevated demand from retail buyers chasing the high, interest-free interest rates on the two papers.

The 17-year IFB sold in March, the 7-year one floated in June, and the 6.5-year paper sold earlier this month are the only three active bonds that traded above their par, or face value, in Friday’s session.

Read: Infrastructure bond set to be oversubscribed

NSE data shows the November IFB traded at up to Sh103.97 for every Sh100 or par value, while the price of the June IFB touched Sh102.30 on Friday. The March paper, meanwhile, traded at Sh102.15 per every Sh100 in deals valued at less than Sh50 million each.

Other IFBs listed on the NSE are trading between Sh71 and Sh97 per every Sh100.

The November IFB pays a coupon of 17.93 percent, the June paper 15.83 percent and the one sold in March 14.4 percent. These rates are significantly higher than earlier issuances that averaged between 10.85 percent and 13.94 percent, hence the premium being demanded by holders when selling their paper in the secondary market.

The government is also looking to take advantage of this demand, having reopened the sale of the November IFB via a tap sale, which is running until December 6, targeting Sh25 billion.

The initial sale of the IFB, which targeted Sh50 billion, closed on November 8, raising Sh67.06 billion against a target of Sh88.9 billion.

Other fixed-rate bonds are trading at a discount but have seen lower activity in infrastructure bonds.

In the secondary market, bonds are sold for a premium or discount of their face value — the actual value or cost of the bond at its first issue.

Bond prices and yields usually feature an inverse relationship where a rise in one rate signals a decline in the other.

When rates on new issuances in the primary market go up, investors seek to sell existing holdings (which pay less interest) to reinvest in the new issuances to lock in higher returns.

This rise in supply compared to demand pushes down the price

they are willing to accept for their papers, hence the inverse relationship between yields and prices.

Investors holding bonds to maturity are, however, sheltered from the shifts in yields and prices as they stand to earn the face value of the paper at maturity.

For investors looking to sell, the collective losses arising from price discounts run into billions of shillings.

Read: Investors book record returns in the March infrastructure bond

Data from the Capital Markets Authority shows that, between April and August, bondholders made actual losses of Sh9.6 billion when selling their paper at the NSE. They realised Sh254.87 billion when selling, against a par value of Sh264.47 billion on their bonds.

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