The secondary bond market turnover at the Nairobi Securities Exchange (NSE) fell by 22 per cent in the third quarter of the year compared to quarter two, hit by reduced liquidity in the market and low supply of the preferred shorter-term paper in the market.
NSE data shows the market traded Sh123 billion bonds during the quarter, down from Sh150 billion in the second quarter of the year.
Turnover for the year-to-date is also trailing 2017, standing at Sh339 billion for the nine months to September against Sh344.5 billion for a similar period last year.
The market has thus bucked expectations of higher trading in the fixed income segment at a time equities are underperforming, with analysts saying that those holding the short-tenor bonds that were in demand were reluctant to sell due to interest rate uncertainty.
“Liquidity is a major driver in fixed income trading. This (liquidity) was constrained in the third quarter, as expected, being the first quarter of the budget cycle. This was reflected in the average interbank rate edging up 37 basis points quarter-on-quarter to 5.38 per cent, peaking at 8.53 per cent,” said Genghis Capital analyst Churchill Ogutu.
“The subdued turnover was also on account of a dearth in short-end papers at the primary bond issues during the quarter. The market was marked with elevated demand for short-term bonds—by banks (and also institutional investors who have reduced duration in the interest rate cap environment)—but low supply.”
Market intermediaries usually lean on higher bond commissions whenever equities underperform, but in this case both investment classes have recorded reduced activity thus setting stockbrokers up for a fall in revenue compared to last year.
Data compiled by Standard Investment Bank shows equities turnover has been coming down quarter on quarter this year, standing at Sh31.9 billion in quarter three, compared to Sh61 billion in quarter one and Sh47 billion in quarter two.