Investors have increased their activity on the secondary bonds market at the Nairobi Securities Exchange (NSE) this year, reflecting increased demand for lucrative infrastructure bonds (IFBs) that are trading at a premium amid falling rates on new auctions.
NSE data shows that investors traded bonds worth Sh407.4 billion the first two months of the year, an increase of 23 percent compared to the Sh332.1 billion worth of paper traded in January and February 2024.
Trading activity has mainly been concentrated on an 8.5-year 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.
These bonds are now highly sought after by investors following a fall in yields (and rates on new issuances) after the Central Bank of Kenya (CBK) reduced its base rate from 13 percent to 10.75 percent between August 2024 and January 2025.
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 indicate 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.
The 8.5-year IFB is now trading at a price of Sh119.7 per bond unit of Sh100 at the NSE, representing a premium of 19.7 percent on its face value, while the other three papers are trading at between Sh105 and Sh114 per unit.
At these prices, investors holding the papers have tended to cash in to pocket the premium, with the bulk of the sales seen in the third week of February when the market moved Sh127.4 billion worth of bonds.
The spike in trades followed a buyback of Sh50 billion worth of domestic bonds by the Treasury in the second week of February, which released liquidity into the market.
Overall, the turnover in February stood at Sh250.2 billion, up from Sh157.3 billion in January. In 2024, the January turnover stood at Sh60.8 billion, and February at Sh271.3 billion. The bonds market remained upbeat throughout last year to record an all-time high turnover of Sh1.5 trillion, which was more than double the 2023 turnover of Sh643.9 billion.
