Taxable bonds have recorded a significant price rally, joining infrastructure bonds in trading at a premium in the secondary market amid a significant fall in interest rates on new government securities.
The price of bonds that were issued at higher interest (coupon) rates has soared as holders demand a premium from buyers to part with the papers.
Bond yields and prices usually have an inverse relationship where higher prices drive down the rate of return or yield on the fixed income assets.
Yields on the benchmark 10-year paper have for instance dropped by 0.85 percent since the start of the year to 12.7549 percent as of February 7 from 13.6 percent on December 31, 2024 according to data from Capital A Investment Bank.
“Benchmark bonds rallied for the third consecutive week as the NSE bond index recorded a 152-basis points week-over-week rise to close at 1,132.25 points. This was largely driven by 63 and 55 basis point declines in 10-year and two-year bonds respectively,” analysts at Capital A Investment Bank said in a note.
The implied yield on a 10-year paper issued in March last year with a 16 percent coupon has for instance since fallen to 13.2074 percent while the bond’s price hit a premium of Sh112 to the par value of Sh100 as of Thursday last week.
The changes imply that investors are willing to pay a premium to lock in the fixed return of 16 percent as interest rates tumble.
The taxable bonds largely traded below their par value last year as higher interest rates in the primary market dimmed demand for the lesser yielding papers.
The overall decline in domestic interest rates has however turned the tide as the papers become lucrative to investors.
The premium placed on tax-free infrastructure bonds has meanwhile risen further with the February 2024 infrastructure bond for instance recording a premium price of Sh118.68 at the Nairobi Securities Exchange (NSE).
Interest rates on government securities are expected to fall further following further cuts to the benchmark interest rate by the Central Bank of Kenya (CBK) earlier this month.
The CBK lowered its benchmark interest rate by a further 0.5 percent to 10.75 percent from 11.25 percent previously as both inflation and exchange rate stability persisted at the start of 2025.
The loosening of monetary policy is expected to further drive down rates -including NSE implied yields and primary auction coupon rates.
Interest rates on the shorter dated Treasury bills have continued to set precedence with the return on the 91-day paper for instance falling below nine percent last week.
The lower interest rates are expected to cut the government domestic financing costs at a time when the exchequer is set to turn on local debt market to finance the expanded 2024/25 budget deficit.
