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Top banks stockpile Sh1 trillion bonds for sale as rates fall
According to an analysis of nine listed tier I banks’ government securities portfolios by this publication, the share of papers available for sale rose by Sh244.9 billion in six months ending June 2025 to Sh1.06 trillion from Sh815.3 billion a year ago.
Top banks are holding Treasury bonds worth Sh1 trillion for sale, reading themselves to make billions in profits from the sale of the government securities as interest rates continue to fall.
The price of government bonds in the secondary market at the Nairobi Securities Exchange (NSE), has soared over recent months on investor demand as the return earned from new issuances in the primary market fall on lower market interest rates.
Bond prices and yields usually have an inverse relationship where falling returns result in higher prices as investors seek papers with a larger payout in a low-interest rate environment.
According to an analysis of nine listed tier I banks’ government securities portfolios by this publication, the share of papers available for sale rose by Sh244.9 billion in six months ending June 2025 to Sh1.06 trillion from Sh815.3 billion a year ago.
Equity Group held the most tradable papers of the nine banks at Sh287.6 billion ahead of KCB Group (Sh147.1 billion) and Absa Bank Kenya (Sh117.1 billion).
Commercial banks hold government securities in two parts; the first- the tradable book which allows the lenders to buy and sell Treasury bonds, and a second, which sees banks hold the securities up to maturity.
The Central Bank of Kenya (CBK) reckons that commercial banks can unlock higher profitability by cashing in on the higher bonds’ valuation (mark-to-market gains) by selling the papers.
“The financial sector can also benefit from the decline in interest rates as a result of easing monetary policy. The monetary policy easing results in decline in the deposit rate, lending rate, coupon rate as well as the yields, which increases mark-to-market valuations,” CBK says in its financial sector stability report.
“Increase in the market-to-market valuation increases liquidity of banks as well as enabling them to borrow using the bonds as collateral. The increase in the market-to-market valuation can be realised once bonds are sold, which increases profitability.”
Interest rates on government securities have declined in the past 12 months, triggered largely by CBK cuts to the benchmark interest rate on a stable inflation and exchange rate.
The Central Bank Rate (CBR) has fallen from 13 percent in August last year to 9.5 percent at present triggering a downtrend in domestic interest rates.
Interest rates on government paper have subsequently subsided with the 364-day paper’s return falling from a peak 16.98 percent in April 2024 to 9.54 percent as of last week.
Returns from new/reissued Treasury bonds have similarly slumped on the lower domestic interest rates.
Investors who missed out on the issuance of papers with higher returns have been forced to buy out bondholders in the secondary market at a premium to attain the same level of interest income. This has driven the demand for the high yielding papers which now trade at a premium on the NSE.
An 8.5-year infrastructure bond sold in February last year with a return/coupon of 18.46 percent for instance is selling at a premium of as much as Sh122 to its par price of Sh100 revealing a profit of 22 percent for holders willing to sell the papers.
Sellers of bonds on the Nairobi Securities Exchange (NSE) earned Sh101.4 billion in profit in six months of the year to June after selling papers bought at Sh1.28 trillion for a higher Sh1.39 trillion.
The number of deals in secondary bonds trading stood at 20,461 in the period.
Commercial banks are large beneficiaries of the secondary bonds trade based on their heavy holdings of tradable securities. The lenders have increased their holdings of tradable securities while reducing the value of papers held to maturities.
Government securities held to maturity by the nine top listed banks slumped to Sh519 billion from Sh528.6 billion a year prior.
Banks continue to hold little to no government securities on a term basis with Standard Chartered Bank Kenya having a balance of zero in their portfolio of government securities held to maturity.
Combined, all commercial banks held Sh2.69 trillion in domestic debt at the end of June 2025 including Sh1.1 trillion in fixed-rate Treasury bonds and Sh1.03 trillion in infrastructure bonds according to secondary CBK data.
“The government securities have higher returns and lower administrative costs compared to loans and advances, placements/deposits, investment in property and equities,” CBK added.
“The risk of default is also lower relative to competing assets in the portfolio. Hence, the financial sector on aggregate has a higher propensity to invest in government securities and advance loans to regional, national and State-owned enterprises.”
