Investors reap gains of over 21pc from infrastructure bond sale
The 8.5-year IFB, issued in February 2024, carries a tax-free coupon or actual interest rate of 18.46 percent, which is currently the highest return on offer on any government security on the market.
Investors in an 8.5-year infrastructure bond (IFB) are enjoying capital gains of more than 21 percent from the sale of the papers in the secondary market of the Nairobi Securities Exchange (NSE), cashing in on demand from buyers chasing the lucrative paper amid a fall in rates from new issuances.
The 8.5-year IFB, issued in February 2024, carries a tax-free coupon or actual interest rate of 18.46 percent, which is currently the highest return on offer on any government security on the market.
Data on bonds traded on the NSE shows that the paper has a price of Sh121.29 per bond unit, which is a fifth higher than its face value of Sh100 per unit.
A 6.5-year IFB sold in November 2023, with a coupon of 17.93 percent—the second highest return—is also giving sellers a high premium in the market, with a price of Sh114.91 per unit.
In the secondary market, bonds are usually sold at a premium or discount of their face value—which is the actual value or cost of the bond at its first issue.
There is an inverse relationship between bond prices and yields, which indicates the rate at which investors are willing to lend to a government at a particular point in time.
When rates on new issuances in the primary market are going up, investors seek to sell existing holdings (which pay less interest) in order to reinvest in the new issuances to earn higher returns. This rise in supply in comparison to demand pushes down the prices that they are willing to accept for their securities.
On the other hand, when interest rates are going down for new issuances, those holding existing securities that have a high coupon rate are less willing to sell, and on any sales, they demand a price premium to compensate them for ceding the lucrative paper in a lower interest rate environment.
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.
Other fixed-term bonds, which unlike IFBs attract tax of between 10 and 15 percent, are trading at lower price premiums (and some at discounts) due to their coupons being closer to the prevailing market yields.
Interest rates on government paper have significantly fallen in the last three months, in tandem with the cut in the central bank rate from 13 percent in August to 11.25 percent in December.
Treasury bill rates have thus come down from highs of nearly 17 percent in October to between 9.8 and 11.4 percent, with bonds expected to adopt a similar trend for new issuances.
The Central Bank of Kenya (CBK) is currently selling a pair of reopened 15-year and 25-year bonds, which carry coupons of 12.65 percent and 14.18 percent respectively.
In December, the government reopened a 10-year bond (first sold in March 2024), which carried a coupon of 16 percent, but saw investors taking a lower effective yield of 14.68 percent on accepted bids.
The successful bidders averaged a price of Sh110.17 for every unit of Sh100 on the paper, meaning that they were willing to pay a premium on the face value to secure the bond’s coupon.
