Banks and fund managers rule the bond market

By James Anyanzwa

Commercial banks and fund managers have dominated the local corporate bond market as demand for fixed income securities increases, according to a report by the Capital Markets Authority (CMA).

The market regulator’s quarterly bulletin says commercial banks and fund managers held bond portfolios worth Sh3.2 billion and Sh4.4 billion respectively as at June.

Insurance companies and investment companies controlled Sh461.8 million and Sh429.3 million respectively, while individual investors pumped in a Sh322.5 million.

The primary bond market continued to be attractive to investors as they attempted to re-allocate funds to long-term financial instruments owing to persistent volatility in the equity market.

The Government intends to borrow heavily from the capital markets by issuing bonds to finance mega infrastructure projects.

According to the report, the preference for longer dated bonds continued for the second month with the average bond size traded over the period falling to Sh43 million from Sh56 million and the average tenure rising to 7.2 years from 6.7 years.

Some Sh21.6 billion worth of bonds were traded in June compared to Sh22.31 billion the previous month. "Market activity is likely to remain active as investors position themselves to participate in an increasingly liquid secondary bonds market," said CMA.

The index on government debt securities indicates a general increase in bond prices over the last four months on the back of an overall decline in interest rates.

Kenya’s bond market has, however, remained relatively underdeveloped compared with other markets in the continent.

Egypt and South Africa

The corporate bond market has remained inactive with only Sh25 billion having been raised during the past 12 years.

Total bond turnover last year was only $1 billion compared to Egypt and South Africa with $4 billion and $2 trillion.

South Africa accounts for 98 per cent of the continent’s bond turnover with turnover ratio exceeding 100 per cent compared to Kenya whose turnover is below 25 per cent. The market’s poor performance has been attributed to mainly increased competition from direct bank lending as a debt option, a manual trading platform and settlement system, low culture of credit rating bond issues and low investor awareness.

The slow pace of reforms has hindered faster growth of the country’s bond market.

Budget speech

Trading of bonds manually in the secondary market has delayed the rollout of the Over-The-Counter (OTC) trading platform thereby making the bond market illiquid, with high inflation remaining a concern to long term fixed income securities since it is perceived to undermine expected returns.

In this year’s Budget speech Finance Minister Uhuru Kenyatta reduced withholding tax on long term bonds of ten years maturity and above from 15 per cent to 10 per cent.

The move is expected to increase demand for longer dated bonds because the interest return paid will rise. New investments by pension schemes, which receive statutory contributions, are required to be put in Government securities and infrastructure bonds issued by public institutions only.

It is expected that the decision, which aims to bar the National Social Security Fund (NSSF) from investing in the stock market, would increase bond subscriptions.

Heavy government borrowing from local markets to finance infrastructure projects could lead to a slow down in economic growth in the coming financial year, a possible tightening of money supply and an interest rates surge that might prove costly to both the borrower and the economy.

Investing in bonds at a time when interest rates are rising not only lows returns but also results in capital losses when bondholders sell before maturity.