Shares at the Nairobi Securities Exchange (NSE) rewarded investors with the highest returns in the third quarter of the year, eclipsing bonds and cash deposits whose gains dropped in the wake of falling interest rates.
During the three months to September, investor wealth at the bourse, as measured by market capitalisation, rose by 15.1 percent, or Sh367.4 billion, to reach Sh2.78 trillion.
This increase took the market’s overall gain since the beginning of the year to Sh845 billion.
The surge in the stock market followed renewed demand for shares by foreign investors, and increased participation by locals following the rising share prices.
Among other financial asset classes, bonds offered the second-highest return with annualised interest rates of between 12 percent and 14 percent on new issues floated between July and September.
Treasury bill interest rates fell from a range of 8.13 percent and 9.72 percent at the end of June to the current 7.91 percent to 9.53 percent.
Returns from fixed cash deposits in banks declined from 8.37 percent in June to 7.74 percent in August, while dollar depositors recorded flat returns after the shilling-dollar exchange rate remained unchanged at an average of Sh129.24 between June and September.
The British pound and the euro have depreciated by 2.3 percent and 0.4 percent, respectively, against the shilling, eroding the local currency value of these two currencies.
“Equities, as expected, outperformed fixed income in the third quarter on account of a shift in investor focus to stocks as yields in the debt market trended downwards in falling inflation and the central bank easing its benchmark rate,” said Standard Investment Bank senior research associate Wesley Manambo.
“Foreign participation also rose in the period, which indicated the investors were diversifying their portfolios from developed markets into emerging and frontier markets, as overall market-related risks softened.”
The share prices of the NSE’s largest companies by market cap, including Safaricom, Equity Group, EABL and KCB Group, rose by between 14 and 30 percent in the quarter, backed by foreign purchases and dividend-chasing investors.
Mr Manambo added that the market is expected to remain upbeat in the last quarter on the back of the recent 0.25 percentage point rate cut by the US Federal Reserve and the expected further cuts later in the year.
Foreign investor inflows into equities are expected to rise as returns from US assets fall in line with the lower rates.
Similarly, 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.
For the bond market, ordinary bonds sold in July and September offered interest rates of between 12 and 14.1 percent, which gave investors a real return of 10.8 percent to 12.7 percent after deduction of the 10 percent withholding tax.
In August, the Treasury also reopened two tax-free infrastructure bonds of 15- and 19-year tenor, which pay interest at 12.5 and 12.96 percent per year.
The bond rates have come 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.
Bonds have, in the past three years, become a popular investment option for retail investors in Kenya, with households now holding Sh434 billion worth of government securities, according to fresh CBK disclosures.
Treasury bills sold in the quarter paid single-digit rates, following a sharp decline in yields on the short-term papers over the past year, in line with the CBK’s cuts on the benchmark rate.
The 91-day Treasury bill’s rate stood at 7.91 percent in the most recent auction last week, having come down from 8.13 percent at the end of June, while the rates on the 182-day and 364-day papers have fallen to 7.98 percent and 9.53 percent, respectively, from 8.46 percent and 9.72 percent at the start of the third quarter.
Treasury bills also attract a withholding tax of 15 percent on interest, meaning that the net returns at current rates are between 6.72 percent and 8.1 percent.
For those opting to keep cash in fixed deposit accounts in banks, the average interest rate declined to 7.74 percent in August from 8.37 percent at the end of June and 10.45 percent at the beginning of the year.
Market funds
Banks have progressively cut the deposit rates in line with the Central Bank Rate as they seek to lower their cost of funding and protect themselves against loss of interest margins when they cut their charges on customer loans in line with the CBK signal.
The falling interest rates on fixed income assets have translated to lower annualised yields on unit trust money market funds that have bonds, cash deposits and Treasury bills as their underlying assets.
The money market funds are currently paying between 5.08 percent and 12.8 percent in annual interest, compared to a range of 4.8 percent and 13.5 percent at the end of June.
Similar to bonds, the money market funds have seen heightened investor demand as more Kenyans seek to invest in the formal markets through professional fund managers. As a result, the assets under management in collective investment schemes climbed to Sh596.3 billion by June 2025, from Sh254.1 billion in June 2024, and Sh176 billion in 2023.
Capital Markets Authority (CMA) data shows that the number of investors in the collective investment schemes hit 2.46 million in June 2025, up from 1.21 million in June 2024 and 247,409 in September 2022.
