Holders of Kenyan government bonds are staring at further erosion of the value of their assets as interest rates continue rising, cutting the prices on offer for those selling bonds in the secondary market.
Institutional investors such as banks and pension funds that report the value of some of their securities based on the current valuation are also looking at paper losses on their balance sheets.
Bond yields and prices at the secondary market at the Nairobi Securities Exchange (NSE) usually feature an inverse relationship where a rise in one signal a decline in the other.
The yields rise when risk sentiment goes up, meaning investors are willing to offer their bonds at a discount to secure buyers and in turn take up new issuances in the primary market at higher interest rates.
On the other hand, a fall in risk sentiment sends yields lower and prices higher, due to investors demanding a premium to let go of their bonds in hand on account of new issuances of similar tenor paying less in interest.
Focus has in recent months been on the rising rates on primary bond sales, the latest of which was the dual tranche January 2024 offer which is paying 18.39 percent and 18.77 percent for its three- and five-year tranches respectively. These rates are paid to bondholders for the life of the paper.
Those who sell their securities along the way do so either at a premium or discount of their face value—the actual value or cost of the bond at its first issue that is set at Ksh100 ($0.67) per unit of bond.
“What isn’t necessarily well flagged is that an increase in an interest rate decreases the value of a bond, so despite the rush for investments, there has been a lot of pain in the portfolios of bond investors,” said Muathi Kilonzo, managing director and head of equities at EFG Hermes Kenya.
As per the NSE’s bonds price list, longer dated bonds have suffered the biggest margin of price erosion, while short term infrastructure bonds have fared the best.
The 15-year bond sold in July 2019 saw its price touch lows of Ksh71 ($0.47) per Ksh100 ($0.67), while a 16-year infrastructure bond sold in October 2019 was also trading at a similar price.
On the other hand, a 6.5-year infrastructure bond sold in November 2023 traded at up to Ksh104 per unit ($0.69), making it the only paper trading above par.
The biggest bondholders are commercial banks, whose fair value paper losses have at times in the past two years gone into double-digit billions due to rising yields.
Although banks will rarely sell such bonds—which would actualise the losses—they have been reducing their purchases of new bonds to reduce the exposure.
Commercial banks usually hold government securities in three ways; to term and at amortised cost which poses no risk of paper losses, government securities held for dealing purposes and under fair value through other comprehensive income (FVOCI).
Securities held under FVOCI are usually kept for trading purposes but can also be held to term.
