The Kenyan fixed-income market, a crucial component of the capital market, faced a challenging year in 2022, despite some notable positive developments. The Central Bank of Kenya’s Financial Sector Report for September 2023 highlights the dynamics within the fixed income segment, which remained subdued as various factors impacted its performance.
One of the noteworthy positive developments within the Kenyan fixed income market was the increased issuance of corporate bonds. Acorn Holdings, a prominent player in the real estate sector, issued KSh 1.22 billion in corporate bonds, which was part of an approved KSh 5.7 billion issuance. Additionally, the East Africa Breweries issued a 5-year corporate bond worth KSh 11 billion, receiving overwhelming support with a subscription rate of 345 percent. The year also saw the Kenya Mortgage Refinance Corporation (KMRC) issue a KSh 1.4 billion bond that was oversubscribed at 478.6 percent. These bond issuances demonstrated a positive outlook for Kenya’s corporate bond market.
However, the bearish trend in the equities market spilled over to the fixed income segment, leading to several challenges. The fixed income market was further subdued by heavy undersubscriptions in the primary market, and an increasing number of bonds being held under the Held to Maturity category. These factors contributed to a significant decline in bonds trading in the secondary market, which fell by 22.5 percent to KSh 741.8 billion in 2022, down from KSh 957 billion in the previous year.
One key observation was the tendency for investors to hold bonds to maturity, as evidenced by the low bonds turnover ratio. This further exacerbated liquidity issues in the secondary bond market and resulted in the dislocation of the yield curve, making it less attractive to investors.
The lackluster investor appetite for bonds extended to the primary market, where most bond offerings were oversubscribed in 2022. This was largely due to low demand driven by rising interest rates, which led to the outward shift of the Government Securities Yield Curve. The shift in the yield curve signaled higher domestic debt costs for the Kenyan government.
Despite the positive corporate bond issuances, these challenges in the fixed income market highlight the importance of addressing issues related to liquidity, investor sentiment, and the impact of changing interest rates. As Kenya seeks to foster a robust and diverse capital market, it will be essential to address these challenges and work toward creating an environment that can attract a broader spectrum of investors and drive growth in the fixed income segment.
The data presented in the Central Bank of Kenya’s Financial Sector Report for September 2023 emphasizes the need for a strategic approach to navigate these challenges and unlock the full potential of the Kenyan fixed income market in the coming years.
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By Delino Gayweh
12th, October 2023
Serrari Financial Analyst
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