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Higher demand for bonds as CBR cut eats into yields

Central Bank of Kenya
Central Bank of Kenya. FILE PHOTO | NMG 

Fixed-income market investors have shifted their attention to infrastructure bonds (IFBs) as yields start to go down following the recent cut in the policy rate.

Genghis Capital, an investment bank, said in its latest analysis of the market that the IFBs have experienced increased demand since the rate cut. The bonds are exempt of taxes, making their returns higher than those of ordinary bonds.

“With yields charting a downward trajectory following last week’s rate cut, investor appetite has shifted to the tax-free infrastructure bonds (IFBs) which had a demand overhang,” said Genghis Capital.

The analysts said yields on the longer duration IFBs averaged 11.75 per cent last week and are likely to settle at 11.50 per cent this week. Falling yields mean rising prices.

Lack of supply in the secondary market has constrained the value of the bonds traded. The turnover in the secondary market would have been higher than the Sh10.9 billion recorded – a 13.1 per cent increase from the previous week – if the supply had been higher.

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“Secondary market turnover improved 13.13 per cent week on week to close at Sh10.9 billion driven by activity across the curve. The top five traded bonds accounted for 54.50 per cent of the week’s activity. The newly issued 20-year paper, which was the most active paper, traded at levels between 12.81 per cent and 13.25 per cent,” the analysts said.

However, the analysts said they expect that the volumes will fall this week on account of the focus on the newly issued primary bond. “Trading volumes in the week will be slightly muted, with most investors shifting focus to the month's primary bond,” said Genghis.

In the primary market, the Treasury is currently seeking Sh40 billion through a 10-year bond whose coupon (or interest) rate is to be determined by bidders.

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