Activity in the secondary bond market continues to rise since the start of 2025 as interest rates fall, making previously issued securities more attractive to investors on relatively higher yields to future issuances.
The turnover of the secondary bond trading market went up 41 percent in the first quarter to March 2025, reaching Sh651 billion from Sh459.4 billion at the same stage previously, according to data from the Nairobi Securities Exchange (NSE).
According to analysts, activity in the secondary bond market has been supported by the potential for locking in higher returns and profits from selling papers with higher returns to investors who missed out on the instruments’ primary issuances.
“A year-on-year comparison shows improvement in bond turnover and number of deals respectively as investors take advantage of pockets of opportunity to lock in better rates or realize capital appreciation,” said analysts at Sterling Capital.
Interest rates on government securities have hit a declining trend on benchmark rate cuts by the Central Bank of Kenya (CBK), reducing the rate of return available to investors in the primary bonds market.
This has forced investors seeking a higher yield to buy previously issued bonds in the secondary market albeit at a premium.
Bond prices and yields usually have an inverse relationship where a fall in yields results in higher prices for the same paper/security.
The 18.46 percent coupon infrastructure bond offered to investors in the primary market in February last year for instance commanded a premium of as high as Sh121.59 yesterday compared to its par value of Sh100 as the traded yield fell to 13.3 percent.
The 8.5-year timed infrastructure bond has been the most traded security in the secondary bond market over the past year as investors chase down the highest yield in the market.
The allure for the infrastructure bond saw the NSE post a record Sh1.5 trillion in secondary bond trading turnover last year, helping the bourse pocket Sh170 million in revenues from its 0.1 percent bonds levy.
The paper was issued when the benchmark interest rate stood at a high 13 percent, boosting the return available for investors.
Yields on government securities including Treasury bills have since hit reverse gear with the CBK cutting its benchmark to 10.75 percent at present from the 13 percent high in August last year.
The return on the shortest-dated Treasury bills- the 91-day and 182-day papers have fallen to single digits from highs of nearly 17 percent in 2024.
Returns on government securities are expected to remain under pressure in the coming months as the CBK is widely seen keeping its benchmark low on a stable inflation and exchange rate.
The falling yields on Treasury bills and bonds are expected to relieve pressure on domestic debt service costs allowing the exchequer to borrow cheaply from the local market.
The expectation for even lower returns on government paper has seen investors gravitate towards longer-dated securities in bond issuances and the 182-day and 364-day papers in Treasury bill auctions.
