What you need to know:
- Investors traded Sh340.8 billion worth of bonds in the market between January and September this year, compared to Sh233.8 billion over the same period last year.
- Analysts expect banks to buy more paper in face of squeezed margins by rate caps.
The turnover in the secondary bonds market for the first nine months of the year has grown by 46 per cent compared to 2015, reflecting the shift in investor capital to fixed income from equities.
Nairobi Securities Exchange (NSE) data shows investors traded Sh340.8 billion worth of bonds in the market between January and September this year, compared to Sh233.8 billion over the same period last year.
The upturn in bond activity coincided with reduced trading in equities for the first three quarters of the year, with shares worth Sh123.6 billion traded compared to Sh163.3 billion in January to September 2015.
Local institutional investors led by banks and pension funds have particularly taken to the bonds market this year—both primary and secondary— leaving foreigners to dominate the equities market.
“Banks have been active in the bonds market trying to pick up yields, considering that the government has been reducing its take-up of high price offers in the primary market. Fund managers acting for pension funds have also been active in the market,” said Standard Investment Bank (SIB) head of research Francis Mwangi.
Since the beginning of the year, banks have raised their total holdings of government debt by a huge Sh171.8 billion to Sh1.02 trillion, while pension funds have raised their holdings by Sh104.4 billion to Sh493.4 billion.
This has been partly due to the returns from the equities market sliding in a bear market, which has pushed the NSE 20 share index 19.8 per cent down in the year.
Data compiled by financial services firm Alexander Forbes shows that pension funds had on average increased their fixed-income assets to 72 per cent by June from 70.5 per cent at the beginning of the year, while cutting their holdings in equities from 25.1 per cent to 22.4 per cent.
Going forward, analysts expect the interest in the fixed-income segment of the market by banks will only grow following the capping of interest rates on customer loans, which has squeezed margins on the riskier type of lending.
“We anticipate that banks will scramble for any bond in the market with at least a 14.5 per cent annual coupon rate. We also anticipate that banks may opt to hold such bonds and those acquired during primary auctions to maturity,” say Dyer & Blair analysts in a market note.
For stockbrokers, the contrasting performance of the two market segments is a mixture of gains and losses.
They earn a commission of 0.035 for every bond transaction—either a sale or a buy— which will go some way to softening the hit they will take on lower commission earnings from equities whose commission is between 1.5 and 2.1 per cent per transaction.
The bonds market is, however, dominated by only a few stockbrokers, where the top five account for 80 per cent of the market share, meaning a majority will hardly benefit from the increase in bonds trade this year.