Bond turnover at the Nairobi Securities Exchange (NSE) could cross the Sh1 trillion mark for the first time, with the latest data showing that in less than three months, it had already surpassed 60 percent of what was traded in the whole of last year.
By March 21, the bond turnover at the NSE was at Sh436 billion, or 67.8 percent of the Sh643 billion worth of bonds traded in 2023.
The increased bond turnover points to increased liquidity at the secondary market in an asset class that has for long been illiquid as fixed income gains some attraction amidst a bearish equities market.
“This means that the secondary market is being used as an avenue for bringing in new investors, who may not have accessed it at the primary market,” said David Wainaina, the chief operating officer of NSE.
“It is also being used as an exit mechanism for those who may have started their journey on the primary layer, and now they want to exit so that they can allocate their capital,” added Mr Wainaina.
The poor performance in equities over the past three years, appetising returns across fixed income segments and poor performance of defined contributions pension fund managers has resulted in a rise in demand for bonds, says Ronny Chokaa, a senior research analyst at AIB-AXYS Africa, an investment bank.
Interest in bonds has recently picked up, especially from retail investors whose holding has swelled from six to 12.27 percent in the last 10 months, partly due to the high interest rates.
“Retail investors are warming up to the opportunities in bonds, majorly infrastructure bonds, driven by increased awareness on fixed income products and also ease of transacting in the primary market via DhowCSD,” said Churchill Ogutu, an economist at IC Asset Managers (Mauritius).
The Central Bank of Kenya’s central securities depository, known as the CBK DhowCSD is a bond trading platform which grants retail investors in Kenya and abroad, unprecedented access to attractive returns via the mobile phone, opening up a sector that for long had been the preserve of a small club of sophisticated and deep-pocketed investors.
The platform allows investors to open bond trading accounts at the CBK online, from where they will be placing their bids for their preferred securities during auctions.
Increased interest by non-professional investors in bonds—an asset class which had initially been dominated by banks, pension funds, insurance companies and parastatals—not only points to increased liquidity but also calls for increased vigilance. But as retail investors have been increasing their bond holdings, banks have been busy reducing it.
“Banks would understandably be hesitant to frontload their mass bond holdings to retail depositors since they stand to lose the duration income that banks really rely on for liquidity. This would progressively shrink net interest margins and thus be contrary to their operating model,” added Chokaa.
Interest rates for infrastructure bonds shot up to as high as 18 percent amidst tight liquidity that was also characterised by capital flights, as foreign investors sought cover in safer assets in the United States and other advanced economies.
