Premiums on tax-free infrastructure bonds in the secondary market have started to fall despite expectations of lower interest rates on new bond auctions in the future.
An analysis of bond price data from the Nairobi Stock Exchange (NSE) shows that the traded price per 100 shillings of the recently issued infrastructure bond in February had fallen to 106.4012 shillings on Thursday, from 109.4719 shillings at the end of the year. the previous week.
The February infrastructure bond has been the most traded security in the secondary market since its listing nearly two months ago. Investors who were unable to benefit from the 18.4607% interest rate offered by the security when it was first issued by the Central Bank of Kenya were behind the demand for this security on the NSE, pushing prices above their nominal value. The recently issued 10-year bond has an interest rate of 16.5 percent, signaling a downward trend from peak rates of more than 18 percent.
Bond prices and yields (yields) have an inverse relationship, with a rise in the latter reflecting an environment in which investors demand secondary market discounts to achieve nearly similar yields on new security auctions.
A downward trend in interest rates on new auctions also increases demand for securities with the highest coupons in the secondary market, resulting in higher prices.
Prices of government securities, particularly infrastructure bonds, have increased over the past two years, mainly driven by rising interest rates on primary market issues.
However, it is now expected that interest rates on new bond auctions will start to fall due to reduced government borrowing in the domestic market.
Meanwhile, prices and yields on regular bonds – which are taxed at a rate of between 10 and 15 percent – are falling as investor interest remains stuck on tax-free infrastructure bonds.
In addition, the sharp decline in regular bond prices over the past two years has dampened activity, with security holders mostly opting to hold the securities until maturity to avoid suffering a substantial loss of capital. .
Bonds on the NSE are sold either at full price, at a discount or at a premium to their initial price in the primary market. This implies that a negotiated price of 97 shillings represents a discount from the nominal value, set at 100 shillings, and a loss to the seller, while a price of 101 shillings represents a premium to the nominal value and a profit for the seller.
Premiums on tax-free infrastructure bonds in the secondary market have started to fall despite expectations of lower interest rates on new bond auctions in the future.
An analysis of bond price data from the Nairobi Stock Exchange (NSE) shows that the traded price per 100 shillings of the recently issued infrastructure bond in February had fallen to 106.4012 shillings on Thursday, from 109.4719 shillings at the end of the year. the previous week.
The February infrastructure bond has been the most traded security in the secondary market since its listing nearly two months ago. Investors who were unable to benefit from the 18.4607% interest rate offered by the security when it was first issued by the Central Bank of Kenya were behind the demand for this security on the NSE, pushing prices above their nominal value. The recently issued 10-year bond has an interest rate of 16.5 percent, signaling a downward trend from peak rates of more than 18 percent.
Bond prices and yields (yields) have an inverse relationship, with a rise in the latter reflecting an environment in which investors demand secondary market discounts to achieve nearly similar yields on new security auctions.
A downward trend in interest rates on new auctions also increases demand for securities with the highest coupons in the secondary market, resulting in higher prices.
Prices of government securities, particularly infrastructure bonds, have increased over the past two years, mainly driven by rising interest rates on primary market issues.
However, it is now expected that interest rates on new bond auctions will start to fall due to reduced government borrowing in the domestic market.
Meanwhile, prices and yields on regular bonds – which are taxed at a rate of between 10 and 15 percent – are falling as investor interest remains stuck on tax-free infrastructure bonds.
In addition, the sharp decline in regular bond prices over the past two years has dampened activity, with security holders mostly opting to hold the securities until maturity to avoid suffering a substantial loss of capital. .
Bonds on the NSE are sold either at full price, at a discount or at a premium to their initial price in the primary market. This implies that a negotiated price of 97 shillings represents a discount from the nominal value, set at 100 shillings, and a loss to the seller, while a price of 101 shillings represents a premium to the nominal value and a profit for the seller.