Real returns on government paper after adjusting for inflation have fallen to single digits, as the cost of living measure rises, hitting investors.
Inflation rose to 4.6 percent in September from 4.5 percent in August and 2.7 percent in October last year.
The local fixed income market has seen returns go down in line with the Central Bank of Kenya (CBK) lowering its base rate from 9.75 percent in June to 9.5 percent in August—part of a sustained easing run which has seen the rate come down from 13 percent in August 2024.
Ordinary bonds sold in July and September offered interest rates of between 12 and 14.1 percent, down from the high of 18.5 percent recorded on an infrastructure bond sold in February 2024--which remains the most lucrative government security currently in issuance.
This implies that investor returns from government paper, adjusted for inflation have reduced sharply over the past year, trimming investors real returns.
Real returns from investing in the 364-day Treasury bill fell to 4.933 percent in September from a high of 13.1999 percent in September last year.
The dip has increased the opportunity cost for investing in alternative asset classes such as local stocks.
The return from the 364-day Treasury bill has fallen from 16.7999 percent at the end of September 2024 to 9.533 percent at the end of September 2025. Inflation has meanwhile edged up from 3.6 percent to 4.6 percent over the same period.
The rise in inflation is primarily fuelled by higher food and fuel prices and falling interest rates widely triggered by Central Bank of Kenya (CBK) cuts to the benchmark lending rate.
Last month, inflation hit a 15-month high on costlier food, transport, housing, and energy prices.
“The price increase was primarily driven by a rise in prices of items in the food and non-alcoholic beverages, transport and housing, water, electricity, gas and other fuels over the one-year period,” the Kenya National Bureau of Statistics said in its September report.
Rising inflation is expected to put pressure on real returns from government paper as consumer prices are expected to rise moderately into 2026 while the outlook on interest rates points to much lower returns.
The CBK expects inflation to rise past the five percent midpoint to peak at 5.2 percent in March 2026 on seasonality factors.
The higher inflation rate will eat further on real investor returns if domestic interest rates maintain the same trajectory.
Market analysts expect T-bill rates/short-term interest rates to keep falling in the interim while investors are expected to retain their appetite on the papers to lock in yields on the expectation of much lower returns over time.
“Going forward, we expect yields to continue trending downwards in the near term,” analysts at AIB-AYS Africa said.
“We anticipate sustained investor participation in the coming weeks as investors balance opportunities to lock in yields with the need to preserve short-term liquidity.”
Investors seeking higher returns from the domestic market have turned to the Nairobi Securities Exchange (NSE) which has marked gains of 43 percent since the start of the year to September 30.
The market rally has been driven primarily by local institutions and individual participation.
The gains from the NSE have dwarfed returns generated from not just government securities but also alternative asset classes such as money market funds (MMFs) and commercial bank fixed deposits.
