Continued rejection of expensive money reduces earnings from the primary market.
Bonds turnover at the Nairobi Securities Exchange (NSE) fell nine per cent in the first half of the year as investors pumped money into the primary market, which recorded an oversubscription.
Relatively flat interest rates on the secondary market may have encouraged investors to gun for higher returns elsewhere especially in equities, which in quarter one produced a strong rally before cooling off in the subsequent period.
The lower bonds turnover will negatively affect earnings of stockbrokers due to lower bond commissions, going some way in diluting the expected higher income from equities commissions.
Equities turnover rose to Sh108 billion in the first half of the year compared to Sh82 billion in a similar period in 2017.
“The NSE FTSE Bond Index gained 4.7 per cent during the first half of 2018 while the secondary bonds market recorded reduced activity, with turnover falling to Sh215.8 billion from Sh237 billion recorded in the first half of 2017,” said Cytonn Investments in its market summary for the first half of the year.
“During the first half of 2018, Treasury bills auctions recorded an oversubscription, with the average rate coming in at 142.6 per cent.”
The movement in turnover distribution in the market across the various investment classes continues a trend that was seen from last year when capital started flowing to a recovering equities market.
Bond yields remained flat due to the Central Bank of Kenya (CBK) continued rejection of expensive money from the market.
Most bond issues saw the CBK take up a fraction of the offered bids at a lower rate, then issue a tap sale to fill up the targeted amount.
This saw investors instead opt to put cash in the short-term Treasury bills as they waited to see the direction interest rates would take.
The trend of falling turnover as a result of benign yields could, however, be turned in the second half of the year should the rate cap on bank loans be repealed as has been proposed by Treasury secretary Henry Rotich in the budget.
Lifting the cap will allow banks to raise rates on private sector loans and the eventual shift of funds to customers will force the government to pay a higher rate to fund its domestic borrowing programme. It has paid low prices in the last over one year.
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