The value of bonds traded in the secondary bonds market on the Nairobi Securities Exchange (NSE) jumped by 46 percent to Sh667.8 billion in the first quarter of the year, keeping the market on track to beat the record Sh1.5 trillion turnover realised for the full year in 2024.
Falling interest rates in primary auctions have forced investors seeking high-paying bonds to turn to the secondary market, raising demand for lucrative papers such as the infrastructure bonds issued between 2023 and 2024.
At the same time, the prices on these bonds that carry high interest rates have shot up to offer premiums or capital gains of up to 23 percent within the quarter, encouraging their holders to sell in the secondary market.
Trading activity has mainly been concentrated on an 8.5-year infrastructure bond (IFB) issued in February 2024, and a trio of 17-year, seven-year, and 6.5-year IFBs issued in March, June, and November 2023, respectively.
The four IFBs pay interest rates (coupons) of between 14.4 percent and 18.5 percent.
The 8.5-year paper is trading at the highest premium of any listed bond, touching a price of Sh122.13 per unit of Sh100 (the face value of a bond), translating to a capital gain of 22.1 percent.
In the secondary market, bonds are usually sold at a premium or discount of their face value—which is the actual value or cost of the bond at its first issue.
There is an inverse relationship between bond prices and yields, which indicates the rate at which investors are willing to lend to a government at a particular point in time.
When rates on new issuances in the primary market are going down, investors are reluctant to sell existing holdings (which pay more interest) since they would earn less returns from new purchases in the primary market.
At the same time, those looking to invest prefer to buy these existing bonds in the secondary market rather than take up new issuances due to the higher return.
This rise in demand in comparison to supply pushes up the prices that existing bondholders are willing to accept for their securities.
Over the past eight months, interest rates on bonds in the primary market have come down in line with the Central Bank of Kenya’s (CBK) move to cut its base rate from 13 percent in August 2024 to 10 percent today. Yields in the secondary market have followed suit, hence the rise in bond prices.
The rising participation in the secondary bonds market also reflects increased awareness by Kenyans of bonds as an investment option.
In 2024, holdings of government debt by retail investors, who include individuals, private companies, Saccos, self-help, and religious groups, grew by Sh201.6 billion to Sh772.3 billion. This year, they have poured an additional Sh30.4 billion into the securities, taking their holdings to Sh802.7 billion by April 4.
They helped keep the secondary bonds market upbeat throughout last year to record an all-time high turnover of Sh1.5 trillion, which was nearly double the 2023 turnover of Sh643.9 billion.
