Bonds market plunge leaves NSE investors at a crossroads

Sunday September 10 2023

L-R: Nairobi Securities Exchange CEO Geoffrey Odundo and Capital Markets Authority CEO Wycliffe Shamiah during the SecondStax Portal launch at the Nairobi Securities Exchange Trading floor on November 4, 2022. PHOTO | DIANA NGILA | NMG


The decline in activity on the secondary bond market has adversely impacted bond turnover and reduced transaction incomes for bond dealers.

For example, in the six months to June 30, bond turnover at the at the Kenyan bourse declined by 19 percent to Ksh309 billion ($2.13 billion) from Ksh386 billion ($2.66 billion) in the same period last year.

As a result, the NSE’s bond trading levy fell by 35 percent to Ksh31 million ($213,793.1) from Ksh47.4 million ($326,896.55) in the same period as result of reduced trading activity in government bonds due to rising yields that have led to lower valuations.

However, the Nairobi Securities Exchange (NSE) and the National Treasury are reading from different scripts on the reasons behind collapse of multibillion-dollar bond trade.

Read: NSE, CDSC terminate treasury bond revenue sharing

In the secondary bond market, investors buy and sell bonds already existing in the market while in the primary market investors buy new bonds issued by the government.


The management of the self-listed NSE PLc disclosed through their unaudited financial statements for the six months to June 30 that the government’s increased borrowing through issues of new treasury bonds have stifled bond activities in the secondary market thereby adversely impacting bond turnover.

According to NSE, investors have avoided buying existing bonds in the secondary market in favour of the new issues being floated by the National Treasury.

“Purchases of new government offerings negatively affected secondary trading,” says NSE CEO Geoffrey Odundo.

The situation has been compounded by the fact that some investors have even opted to stop trading at all and hold on to their trading positions for fear of incurring losses under the prevailing high interest rate regime.

“Investors also opted to hold on to trading positions given the prevailing high interest rates,” added Mr Odundo.

Bond prices and market interest rate have an inverse relationship in the sense that when interest rate rises bond prices fall and vice versa. As such bondholders are reluctant to sell their bonds during periods of high interest for fear of losses during decline in bond price.

Read: Kenya’s interest rates cut plan running out of steam

On the other hand, the National Treasury attributed the secondary bond market collapse to double-digit returns on short term government paper (Treasury bills), which have pulled investors seeking to avoid duration risks and maximise their returns on short period.

According to Treasury, this has effectively pulled off activities from the secondary bond market.

“Secondary trading decline during period of sharp rise in Treasury Bills. Bond trading will resume once current upward movement at the shorter end of the market stabilizes,” Haron Sirma, the National Treasury’s director-in-charge of debt management told The EastAfrican.

“The secondary bond market collapses when T-bills rates rise. Why would an investor buy in bonds in the secondary market when shorter end of the market is highly attractive?’ Dr Sirma posed.

Government’s stock of domestic debt increased Ksh503 billion ($3.46 billion) in 12 months to Ksh4.83 trillion ($33.31 billion) in June, 2023 from Ksh4.32 trillion ($29.79 billion) in June 2022, according to data from the Treasury.

In the week ending August 25 the government’s borrowing through treasury bills declined by seven percent to Ksh569.67 billion ($3.92 billion) from Ksh614.73 billion ($4.23 billion) borrowed in June 30 while the state’s borrowing through treasury bonds grew by two percent to Ksh4.11 trillion ($28.34 billion) from Ksh4.01 trillion ($27.65 billion) in the same period.

Treasury bonds constitute 87.8 percent of the total government securities while T-bills constitute 12.16 percent.

The government has deepened its borrowing domestically through the issuance of T-bills and bonds to finance its operations leading to a surge in interest rates that have crowded out the private sector from the credit market to finance productive investments.

Data from the Capital Markets Authority shows that the government issued a total of eight bonds in the primary market during the three months to June this year seeking to raise Ksh185 billion ($1.27 billion) to finance its operations.

Read: Kenya corporate debt market facing investor confidence crisis

These bonds comprised two re-opened bonds, two new issues and four tap sales.

Investors in the money market are demanding a compensation for the value of their money eroded by inflation.

Bonds constitute about 99 percent of the bond market compared with corporate bonds that are underperforming largely due to due diminishing investor interest linked to persistent defaults by firms and lack of a clear cut compensation mechanism for investors.

The NSE and its associate Central Depository and Settlement Corporation (CDSC) Ltd had also to terminate their more than 10-year bond revenue sharing agreement as bond revenue streams hit its lowest.

The two institutions agreed for a three-year revenue ceding timelines (2021-23) through which CDSC would surrender its 0.002 percent bond levy to NSE.

The revenue sharing plan was mooted in 2009 hinged on joint operation of an NSE bond trading infrastructure housed within the CDSC premises.

However, on August 1, Central Bank started implementing its own trading platform for government bonds dubbed ‘CBK DhowCSD’ effectively locking out brokers from the lucrative Treasury bond deals. Under the CBK platform investors can bid directly without involving intermediaries.