Bondholders realised a profit of Sh4.6 billion from selling the 6.5 and 8.5-year infrastructure bonds in the secondary market in March, taking advantage of a rush to acquire the high-return securities ahead of an expected decline in rates in the market.
New disclosures by the Capital Markets Authority show that the 8.5-year infrastructure bond issued in February recorded 1,900 trades in March, realising Sh73.16 billion for the sellers. The face or par value of these bonds stood at Sh68.53 billion, giving the sellers a realised profit of Sh3.51 billion for their paper.
The bond’s attraction to buyers in the secondary market was on account of its tax-free coupon rate of 18.46 percent, which is the highest return on offer for any outstanding government security in the market.
The bond received record bids worth Sh288.7 billion when it was floated in February. The Central Bank of Kenya (CBK) took up Sh240.96 billion, leaving investors with Sh47.7 billion in hand that partially found its way into the bonds secondary market.
The 6.5-year infrastructure bond first sold in November 2023 also recorded significant investor demand in the secondary market, realising trades worth Sh12.14 billion in March, which gave investors a capital gain of Sh1.05 billion above the face value of Sh11.09 billion.
This bond carries a coupon of 17.93 percent, and similar to the February issuance, it was oversubscribed at issuance with bids worth Sh88.9 billion against a target of Sh50 billion. The CBK took up Sh67.1 billion out of these bids.
When bonds are traded in the secondary market, the sellers can either make a capital gain or loss on the price, depending on the prevailing yields on the market.
Bond yields and prices usually feature an inverse relationship where a rise in one signals a fall in the other.
When rates on new issuances are going up, investors seek to sell their existing holdings (which pay less interest) in order to reinvest in new issuances to lock in higher returns. On the other hand, when rates on new issuances are falling, demand for existing bonds with a high rate goes up.
When the two infrastructure bonds were floated, the prevailing yields in the market were on the way up, due to heightened risk perception on government debt at the time.
The partial refinancing of the $2 billion Eurobond in mid-February however lowered this risk, leading to an expectation that the high yields or rates in the market would come down.
A 10-year bond sold in March by the CBK carried a yield of 16.5 percent, before tax, making the elevated rates on the two infrastructure bonds look even more attractive.
Overall, in the first quarter of the year, these two bonds stood out in offering capital gains to investors, as a majority of other bonds resulted in losses for investors.
In the three-month period, investors sold bonds worth Sh209.57 billion, with March alone accounting for Sh126.15 billion.
These bonds had a face value of Sh212.46 billion, meaning that investors suffered losses worth Sh2.9 billion.
