Investors are buying more infrastructure bonds compared to other treasuries in the secondary market, underlining the attractiveness of the securities whose returns have been higher.
The Nairobi Securities Exchange data shows that the value of infrastructure bonds traded in the four weeks of December 2022 was Sh26.42 billion, outpacing the Sh14.81 billion seen in transactions of two, five, 10, 15, 20, 25 and 30-year bonds.
The infrastructure bonds have been traded by a large margin with 1,634 deals compared to 300 for the other bonds over the same period.
Several recent auctions of infrastructure bonds came with an interest rate of more than 13 percent. Interest income of these securities is exempt from withholding tax, raising their appeal among fixed-income investors.
Interest on other bonds is taxed at a rate of 10 percent or 15 percent depending on the duration.
The infrastructure bonds traded include a 14-year paper issued in November last year with an interest rate of 13.938 percent and a six-year security (switch bond) issued in the subsequent month with a coupon rate of 13.215 percent.
In June, the government issued an 18-year infrastructure bond with an interest rate of 13.742 percent.
Analysts have tied the increased trading of the infrastructure bond segment due to the aggressive issuance of the securities by the government in the past months and their higher yields compared to other asset classes.
“A lot of trading has been on the run-bonds (what the market is trading at the moment). The rates offered are also very high considering they are tax-exempt,” said Kenneth Minjire, a senior associate for debt and equity at stockbroker AIB-AXYS.
The popularity of infrastructure bonds has increased at a time when there has been a general rush into government debt securities amid negative returns from other asset classes like listed equities.
Treasuries have become more competitive, offering guaranteed double-digit returns, part of which has been driven by investors demanding compensation for the risk of inflation and weakening of the local currency.
Meanwhile, at the NSE last year, investor wealth shrunk by Sh606.84 billion to close at Sh1.986 trillion.
The slump has been driven by a jump in foreign investor outflows due to reduced investor appetite for emerging markets after a jump in interest rates in developed markets such as the US, where high inflation has forced central banks to adjust rates upwards.
As a result, local investors have also turned to treasuries seeking to protect and grow the value of their capital.
Last month the National Treasury converted Sh49.1 billion worth of government securities that were due to mature this month into a six-year infrastructure bond to reduce refinancing risks.
The new bond was also opened for a tap sale, offering a chance for more investors to take up the paper.
