Roads bonds to earn more as NSE rates rise

Investor interest on upcoming infrastructure bonds could earn a higher return following the recent rise in the average rate of the issues listed on the Nairobi Securities Exchange (NSE).

The rise in the rate comes as speculation heightened that a primary infrastructure bond issue of similar characteristics was likely to be offered before the end of the year.

According to an analysis by investment bank Genghis Capital, the average infrastructure bonds (IFBs) rate has risen by 20 basis points (bps), or 0.2 percentage points, in the past one month.

“Rates on the IFBs have risen an average of 20bps over the past month as market speculation builds up that the regulator will be issuing an IFB before the end of the year,” said Genghis Capital.

For last week, the analysts said the Nairobi Securities Exchange experienced an uptick of interest on IFBs activity as they contributed to more than a fifth of the total. Further, they noted, the top five traded bonds accounted for more than 40 per cent of the total activity during the week.

“The top five traded bonds accounted for 42.47 per cent of the total activity while infrastructure bonds contributed 21.15 per cent of the week’s turnover,” said Genghis Capital. “We close the week with the market still focused on the medium term as well as interest uptick in the infrastructure bonds (IFBs). Turnover [was] driven by trading on the medium term and IFBs,” the analysts added.

In the week between October 26 and November 1, the total turnover for the secondary bond market stood at Sh13.5 billion, Sh400 million higher than in the previous week.

The IFB issued in January this year – and the only one issued so far this year – has the highest yield at 11.66 per cent as of last Friday as compared to other infrastructure bonds. Those issued last year have the lowest average yields of 10 per cent among the IFBs. The January IFB was oversubscribed but the Central Bank of Kenya – as the fiscal agent of the Treasury – dismissed most of the bids as it accepted less than 10 per cent of the total amount it received at nearly 70 basis points lower yield compared to a similar auction done in 2016.

The attraction of the IFBs has been in their tax-free status, meaning that the investor receives the full value of the coupon (or interest) rate offered at the point of issuance. The other bonds attract a withholding tax rate of 10 per cent.