In the year’s second quarter, bond investors on the Nairobi Securities Exchange (NSE) faced challenges, recording net capital losses of Kshs 5.1 bn while selling their securities in the secondary market. This was primarily due to rising interest rates on new debt auctions, causing prices to fall. The Capital Markets Authority (CMA) data revealed that many listed bonds were being traded below their par value, leading to losses of their principal for the holders.
Read more: Treasury Shifts from Issuing Long-Term Bonds Towards Shorter-Dated Bonds
During Q2’2023, bonds with a face value of Kshs 152.5 bn were traded, but the actual traded turnover amounted to Kshs 147.4 bn due to price discounts. Medium-term bonds with tenors ranging from eight to twelve years suffered the most significant value decrease, while infrastructure bonds and recent issuances, which already carried high interest rates, proved more attractive for sellers. Bond yields and prices generally exhibit an inverse relationship, where a rise in one leads to a decline in the other.
When new issuances in the primary market offer higher rates, investors seek to sell existing holdings with lower interest rates to reinvest in the new issuances for better returns. This increase in supply relative to demand pushes down bond prices. Conversely, when new issuances pay lower interest compared to existing bonds, current bond owners tend to hold onto their securities, resulting in a premium for those willing to buy them.
Read more: NSE Bond Turnover Drops 14% in Q1 Amid Challenges
Bonds held to maturity shield investors from shifts in yields and prices, ensuring they earn the face value at maturity. The second quarter saw a decline in bond turnover at the NSE, indicating some holders’ reluctance to trade due to potential capital losses. Government bond interest rates have risen this year, with returns reaching up to 16.8% on a five-year paper. The Treasury has responded by issuing shorter bonds to avoid being locked into high debt service costs for an extended period.
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