Bond rotation triples thanks to excess liquidity

Capital markets

Bond rotation triples thanks to excess liquidity


Central Bank of Kenya. PHOTO FILE | NMG

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Summary

  • The bidders had set a record 151.26 billion shillings for the 21-year infrastructure bond, and with the Central Bank of Kenya (CBK) taking 106.75 billion shillings, they were left with 44.5 billion shillings. billion shillings in unused cash.
  • It was this money that then found its way into the secondary market last week, where demand was mostly for infrastructure papers.

Bond turnover on the Nairobi Securities Exchange (NSE) tripled last week as investors who missed the infrastructure bond sale in September sought to buy the securities in the secondary market.

Stock market data shows investors traded 40.53 billion shillings of bonds last week, an increase of 237.6% from the previous week’s volumes of 12 billion shillings.

The bidders had set a record 151.26 billion shillings for the 21-year infrastructure bond, and with the Central Bank of Kenya (CBK) taking 106.75 billion shillings, they were left with 44.5 billion shillings. billion shillings in unused cash.

It was this money that then found its way into the secondary market last week, where demand was mostly for infrastructure papers.

“Secondary market activity has skyrocketed, with most of the interest shifting to infrastructure bonds. We expect sustained interest in the September 2021 infrastructure bond to continue through the week, ”investment bank Gengis Capital said in a market report yesterday.

“With the upcoming maturity of a 2016 five-year bond as well as the partial repayment of a 2013 12-year infrastructure paper this week, we expect investors to redirect funds to this bond.” Infrastructure bonds normally attract high demand, both in primary sales and secondary exchanges, due to their tax-exempt nature.

This month’s infrastructure bond bears interest at 12.74%. For an investor to achieve a similar net return on an ordinary bond subject to 10% withholding tax, they would need a coupon of 14.12%.

The Treasury, however, has not been willing to pay as much for ordinary bonds in recent issues. A 20-year paper released last month, almost similar in content to September’s infrastructure paper, for example, pays interest at 13.44%, before withholding tax.

Investors can therefore get a premium by investing in the infrastructure bond, which also attracts strong demand from foreign investors.

The lack of performing alternative investment classes has also fueled demand for bonds, with stocks still offering relatively lower returns.

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