Funds are once again pumping cash into fixed-income investments on the back of disappointing performance of equities and bank deposits amid rising liquidity in the market.
This push has seen short-term interest rates on government securities maintain a downward trend in recent weeks, analysts at Commercial Bank of Africa say, although the investors are hopeful of a shift should the rate cap be repealed.
Pension funds, for instance, had raised their asset allocation to equities from 24 to 27.3 per cent in the first quarter of the year when the equities market had a stellar performance, but are unlikely to have continued to do so after the downturn in quarter two that has seen the NSE shed Sh272 billion in market capitalisation since the end of March.
The risk factor in equities is higher than that of government securities even though in times of a Bull run the NSE offers much higher returns to investors.
“The sound liquidity posture has seen increased liquidity allocation towards the government papers supported by their better risk return balance,” says CBA in its latest fixed-income report.
“Meanwhile, the poor performance of local equities and low returns on deposits with commercial banks have seen increased demand for the government papers by funds.”
The CBA analysts say that the funds, which have traditionally eyed longer tenor government paper, are now looking at shorter term issues as they take a wait and see approach pending the review of the rate cap.
This has seen an oversubscription of Treasury bill issues in recent weeks, even as the long-term bonds that the government has been selling remain undersubscribed.
The trend is expected to continue since liquidity has gone up again after a short contraction at the end of June.