Serrari Group

In a robust display of market demand, government-issued infrastructure bonds (IFBs) have been trading at a premium in the secondary market at the Nairobi Securities Exchange (NSE). The surge in interest is primarily attributed to retail buyers seeking the allure of high, interest-free rates offered by these bonds.

As of the latest trading session, only three active bonds surpassed their par value at the NSE. The 17-year IFB from March, the 7-year bond floated in June, and the 6.5-year paper issued earlier this month exhibited trading prices above their face value.

According to NSE data, the November IFB reached a trading price of up to Sh103.97 for every Sh100, while the June IFB touched Sh102.30 on Friday. The March paper traded at Sh102.15 per every Sh100, with transactions valued at less than Sh50 million each.

Contrastingly, other IFBs listed on the NSE are currently trading in the range of Sh71 to Sh97 for every Sh100.

The attractiveness of these bonds is further emphasized by their coupon rates, with the November IFB offering 17.93 percent, the June paper at 15.83 percent, and the March issuance at 14.4 percent. These rates significantly surpass earlier issuances, which averaged between 10.85 percent and 13.94 percent, thereby justifying the premium sought by bondholders in the secondary market.

Seizing the opportunity presented by the heightened demand, the government has reopened the sale of the November IFB through a tap sale. The ongoing sale, which concludes on December 6, aims to raise Sh25 billion. The initial sale, targeting Sh50 billion, closed on November 8, raising Sh67.06 billion against a Sh88.9 billion target.

While other fixed-rate bonds are trading at a discount, infrastructure bonds have seen increased activity in the secondary market. In the bond market, prices and yields exhibit an inverse relationship, where an increase in one signals a decline in the other. This inverse relationship is evident as investors, prompted by higher rates in the primary market, seek to sell existing holdings at lower prices to reinvest in new issuances and lock in higher returns.

Investors holding bonds until maturity are shielded from fluctuations in yields and prices, earning the face value of the paper upon maturity. However, for those looking to sell before maturity, collective losses arising from price discounts have amounted to billions of shillings.

Data from the Capital Markets Authority reveals that between April and August, bondholders incurred actual losses of Sh9.6 billion when selling their paper at the NSE. Despite realizing Sh254.87 billion in sales, this fell short of the Sh264.47 billion par value of their bonds.
By: Delino Gayweh
Serrari Financial Analyst
4th December, 2023

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