Bond traders at the Nairobi Securities Exchange (NSE) are grappling with substantial losses as interest rates persistently climb, marking a challenging trend in the market.
Data sourced from the NSE reveals that bonds traded in the secondary market are being discounted by investors, with markdowns reaching as high as 24.4 percent. This has resulted in holders of bonds purchased in a lower interest rate environment being compelled to sell at reduced prices. The aim is to align returns with the elevated interest rates seen in recent auctions of comparable securities.
In a recent example, a bond featuring a 12.734 percent coupon was sold at Sh75.53 for every Sh100 or par value, underscoring the prevalent steep discounts in the secondary market.
The inverse relationship between bond prices and interest rates is evident, with rising interest rates contributing to lower bond prices. Conversely, bond prices generally rise when interest rates fall.
According to data from the Capital Markets Authority (CMA), bond investors incurred losses of Sh5.1 billion in the second quarter of the year, as a significant portion of listed bonds traded below par value. Medium to long-term bonds bore the brunt of these losses, as investors appeared to shift towards shorter-dated and higher-yielding Treasury papers in the primary market.
The secondary bonds market is witnessing increased activity as investors opt to liquidate their bond holdings for potentially higher returns offered through Central Bank of Kenya (CBK) security issuances. This trend is a response to the escalating interest rates on government securities, influenced by expectations of higher inflation levels and widening budget deficits.
Investors are demanding a premium to invest in government securities, taking into account the government’s funding pressures, which are anticipated to result in greater reliance on the domestic credit market.
The recent infrastructure bond auction demonstrated the prevailing demand for higher interest rates, concluding with a weighted average interest rate of 17.9 percent. Shorter-term interest rates, represented by Treasury bills, have also surged, with the return from the 364-day paper reaching 15.61 percent last week.
In response to the current interest rate environment, the National Treasury has refrained from issuing long-term bonds, aiming to mitigate against refinancing risks. Bond traders continue to navigate this challenging landscape as they assess the implications of the evolving market conditions.
Photo ( NSE)
By: Delino Gayweh
Serrari Financial Analyst
20th November, 2023
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