Bond turnover halves on rate cap jitters

Monthly bond turnover at the Nairobi Securities Exchange (NSE) dropped to the lowest level in nine months in August, driven by investor uncertainty over the direction of rate cap law and the pressure on the shilling.

Data from NSE shows the turnover fell by 51.3 percent in August to Sh41.2 billion compared with July’s trades worth Sh84.7 billion.

The sharp drop was despite the market being fairly liquid and equities markets continuing to underperform.

The head of fixed income at investment bank Genghis Capital Kenneth Minjire said that the uncertainty in the market around the Finance Bill 2019 that is proposing removal of interest rate cap law has left investors undecided on where to put their money.

“The market is not settled on the way this will go- whether it will be fully repealed, amended or will just be retained,” said Mr Minjire.

“If it is repealed, it will have immediate impact on the yields that are traded on the secondary market because banks have been lending Central Bank of Kenya (CBK) more than private sector.”

Kiambu MP Jude Njomo, who moved the rate cap law in 2016, is also back with amendments that seek to address the grounds which the High Court ruled were unconstitutional when striking out the law earlier this year.

If successful, this will likely see the rate cap retained.

Mr Minjire expects though that if banks are handed back a free hand in pricing loans, they will cut their appetite for government paper and open up to lending to the private sector.

Banks are the biggest holders of government domestic debt at 54.35 percent, trailed by pension funds at 28.19 percent.

The shilling has also been under pressure from foreign currencies since the onset of the new fiscal year in July, forcing the CBK to be more aggressive in mopping up excess liquidity in the market.

“When CBK mops up money, that is indirect competition with secondary market trading because it takes money at between 6.5 percent and 7.5 percent,” explained Mr Minjire.