Retail investors grew their lending to the government by Sh130.4 billion to a new high of Sh418 billion in the first eight months of this year, chasing the higher yields on offer amid a drought of returns in other asset classes in the economy.
This incremental amount by retail bond buyers is equivalent to 39 percent of the Sh337 billion growth in the government’s domestic debt since January.
It means that these investors are now lending to the government at a faster pace than banks, pension funds, insurance companies and parastatals— although from a smaller base—and that they have now overtaken the latter pair to become the third largest holders of State debt.
In the government debt classification, retail lenders are classified as ‘other investors’ and include saccos, listed and private companies, self-help groups, educational institutions, religious institutions, and individuals.
The shift in the debt holders’ matrix is indicative of the state of the economy and is also a result of rising awareness among retail investors of bond investments.
The stock market has been caught in a prolonged bear run that has seen investor wealth shrink by Sh445.4 billion since the beginning of January.
Fixed bank accounts have paid between 7.4 percent and 8.1 percent this year, compared to the returns of up to 18 percent available on bonds, and 14 percent of T-bills.
“The ‘others’ might be shifting money from badly performing stocks. With hard economic times, coupons are very attractive too,” said Prof XN Iraki, an economist at the University of Nairobi.
“Banks could be diversifying by putting less money into bonds, they understand better the fall in value as interest rates rise...others might not have the intimate knowledge of bonds that banks have.”
By September 8, the government’s domestic debt stood at Sh4.81 trillion, up from Sh4.473 trillion at the beginning of the year.
Banks, which are the biggest domestic lenders to the government in absolute terms, grew their debt holding by Sh74.7 billion between January and September to Sh2.17 trillion.
Pension funds, the second largest lenders to the state, raised their bond holdings by Sh89 billion to Sh1.58 trillion.
Insurance firms and parastatals raised their State debt holdings by Sh23.4 billion and Sh18.5 billion respectively to Sh353.1 billion and Sh289.6 billion.
In the corresponding period in 2022, pension funds were the biggest new lenders to the State at Sh131.5 billion, followed by banks (Sh64.9 billion), parastatals (Sh41.5 billion), insurers (Sh38.6 billion) while retail investors brought up the rear at Sh21 billion.
In that period, issuance conditions where the government was rolling out long tenor paper favoured pension funds, but not banks, which prefer Treasury bills and shorter-dated bonds.
Paper losses on the mark-to-market valuation of bonds are also a factor for banks and insurance funds in their financial reporting, although these do not translate to actual losses unless the papers are liquidated.