Investors holding an 8.5-year infrastructure bond (IFB) are enjoying capital gains of more than 28.6 percent from the sale of the papers on the Nairobi Securities Exchange (NSE), riding on high demand for high-interest-rate securities amid falling returns on new issuances.
The bond, which is the most lucrative among the government’s portfolio of debt securities and has an annual interest of 18.46 percent, saw its price touch a high of Sh128.57 per unit at the Nairobi Securities Exchange (NSE) secondary market on Friday.
When bonds are sold for the first time (primary sale) by the Central Bank of Kenya (CBK), they are split into units with a face or par value of Sh100 each, which can then be traded at the secondary market in the NSE.
As interest rates on new issuances continue to fall in line with the CBK’s rate cuts, investors have turned to the secondary market for higher-returning papers and are willing to pay a premium on the face value to entice the holders to sell.
There is an inverse relationship between bond prices and yields in the secondary market, where an increase in one results in a fall in the other.
For the 8.5-year infrastructure bond, which was issued in February 2024, the annual tax-free return of 18.46 percent has attracted heavy demand from investors, resulting in its large premium on price.
Unlike IFBs, ordinary bonds have a withholding tax of 10 percent on interest for tenors above five years, while those of a lower duration are taxed at 15 percent.
Other infrastructure bonds issued between 2023 and 2024 are also trading at a sizeable premium, owing to their annual returns of between 14.4 and 17.9 percent.
A 17-year IFB sold in March 2023, which carries a coupon of 14.4 percent, is trading at Sh115. 85 per unit, while a seven-year bond issued in June 2023 at a coupon of 15.83 percent is trading at Sh113.59.
They were followed by a 6.5-year paper issued in November 2023 at a rate of 17.93 percent, which is now being sold in the secondary market at Sh116.68 per unit.
These bonds have underpinned the large capital gains of Sh176 billion enjoyed by sellers in the NSE last year, when investors traded a record Sh2.71 trillion worth of bonds with a face value of Sh2.53 trillion.
In 2024, the bond turnover stood at Sh1.5 trillion, with the profits for sellers amounting to Sh36.1 billion.
The 8.5-year IFB accounted for Sh40 billion out of the 2025 bond trading profits. Its holders sold Sh198.85 billion worth of paper in the period, which had a face value of Sh158.76 billion.
However, retail investors with holdings of below Sh1 million in these lucrative bonds have only a window of about three years to enjoy the high interest rates, due to their amortised or staggered redemption structures.
This short interest-earning window is one of the factors encouraging them to cash in through the secondary market, given that the foregone interest is capped by the short duration before redemption.
The seven-year June 2023 bond, for instance, has its first redemption in June this year, where holders will be handed back 20 percent of their outstanding principal, with amounts up to Sh1 million redeemed in full at this date.
Thirty percent of the remaining principal will be redeemed in December 2027, before the final payment is made in June 2030.
Holders of the 6.5-year bond will be handed back 50 percent of their principal in May 2027, with amounts of Sh1 million and below also repaid fully at this date, before the government repays a further 30 percent in May 2029 and the final instalment in May 2030.
For the 8.5-year paper, the first redemption of 20 percent falls in February 2027, the second one of 30 percent in February 2030, and the final repayment of the balance in August 2032. The 17-year, 2023 bond will be redeemed in two equal instalments in February 2033 and February 2040.
