Bond market down 7.9pc on volatile returns

Money Markets

An investor is served at the Nairobi Securities Exchange offices. Investors have been going for other products instead of bonds. File 

By GEOFFREY IRUNGU

In Summary

Lately, the Treasury bill rates have been falling but they were rising only a few months ago. This was despite the signalling interest rate, the Central Bank Rate (CBR), remaining at the same 8.5 per cent level since April last year.

 

A volatile bond market traded securities worth Sh272.7 billion in the first seven months of the year, down 7.9 per cent from a comparable period last year. The fall in the traded volumes from Sh295.95 billion up to July 2013 is likely to reduce commissions earned by brokerage houses in the first six months of the year.

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Bond holders have to surrender 0.035 per cent in a traded bond’s commission. High inflation, volatile returns and insufficient supply of securities are some of the factors contributing to low business. Market players, however, expect a turnaround in the next five months due to a Sh191 billion provision for domestic borrowing this financial year.

The fall in amounts traded in the seven-month period was a result of volatility in the market as the rate on government securities dropped as well as limited government spending at the national and county levels.

“There was a lot of volatility in interest rates since the start of 2014 and the Treasury had saturated the market with certain two-year and five-year bonds it had introduced in the primary market,” said Alexander Muiruri, head of the fixed-income market at brokerage firm Kestrel Capital. Mr Muiruri said the saturation made it hard to build liquidity in the secondary market for the similar bonds.

Lately, the Treasury bill rates have been falling but they were rising only a few months ago. This was despite the signalling interest rate, the Central Bank Rate (CBR), remaining at the same 8.5 per cent level since April last year.

The turnover of bonds has been rising in recent years, with the amount traded in the same period last year being a 50-per cent growth on the same period in 2012. About Sh197.4 billion was traded in the first seven months of 2012.

In the first few months of the year, government spending also slowed, leading to frequent liquidity constraints in the financial markets.

“Government spending, especially for development projects, has not been that high mainly because it took some time to settle last year. We have seen situations where salaries of government workers have been delayed,” said Fred Moturi, a fixed-income securities dealer at Sterling Investment Bank in Nairobi.

Mr Moturi said the remaining months of the year could however change in favour of the market, with the government raising more debt securities thereby spurring activity in the market.

Lost value

“When the government does not spend liquidity is low in the market and this affects markets, including fixed-income, negatively,” said Mr Moturi. Investors have been going for other products, such as fixed-deposit income market products in banks, instead of bonds.

“Bond buyers have also been holding three-month cash deposits as an alternative since inflation started rising a few months ago,” said Mr Muiruri.

Inflation has become a concern after rising to 7.67 per cent in July, the seventh consecutive month of price increases. Investors normally seek high returns when inflation is rising because they want to compensate for the economy-wide price escalation.

An increase in inflation may urge investors to demand higher returns on bonds to compensate for lost value.