A year in review: Mercurial behavior in the
fixed income market ‐ is there more to follow?
Kenyan Fixed Income Market Analytics
July 2012
(Members of the NSE since 1954)
th
10 Floor, Pension Towers, Loita Street
P.O. Box 45396‐00100 Nairobi, Kenya
Tel: +254‐20‐3240000 Fax: +254‐20‐218633
Website: www.dyerandblair.com
Contacts: Research Department +254‐20‐3240130
Analyst: Poonam Vora –
[email protected]
The Kenyan fixed income market has grown at an unprecedented pace in the last few years,
driven largely by deliberate efforts by the government to deepen the market on the supply side. In
this report, we review the progress in the market for the last year, and provide our thoughts going
forward.
Bonds: Demand for longer term issuances
While issuances in FY2011/2012 have fallen from the levels recorded in the previous year, the
government initiated fiscal consolidation and diversified its sources of funding away from the
domestic market. With the market starved of longer term issuances for the past year, demand for
longer dated bonds have grown as institutions seek to increase the duration of their bond books.
In terms of the direction of the bond yields, our base case forecast is a downward shift in the yield
curve with a flattening bias in the short to medium term moving downwards on the longer term
issuances, as we think that most of the supply for FY2012/2013 will likely be more focused on the
medium and longer end of the curve, cemented by the 150 bps cut in the base interest rate to
16.5% by the Monetary Policy Committee (MPC). Accordingly, amidst an ongoing tug of war
between favorable bond market environments and high price burden, yields should remain within a
limited range over the short term.
With the inflation trending downwards steadily and factors contributing to core inflation such as
non‐food and non fuel based inflation edging downwards in the short term, expectations of further
base rate cuts will shape up, causing yields to decline further. We expect further base rate cuts of
between 300‐450 bps in the upcoming year.
Trading in the Bonds Market
We believe that the initial 150 bps cut in the base rate is expected to boost up volumes on the
secondary bond market, with investors seeking to lock in higher yields in the expectation of building
up of further cuts in the base rate. With the MPC changing their once‐monthly meetings to once in
2 months, the gap between the meetings is likely to spur high subscriptions in the primary market
especially if longer dated bonds are in the offing. In the short term, we also expect an ease in
liquidity due to higher redemptions to augment trading volumes.
Corporate Bond Outlook still dull
FY2011/2012, this segment of the bond market remained quiet. The only corporate bond that was
listed was the Shelter Afrique KES 2.5 billion floating rate note in September 2011, accounting for a
meager 1.8% of total amount raised in government bonds last year. High interest rates during the
year have crowded out more issuances of corporate bonds as companies look for other means of
funding such as subordinated debt or funding through equity. For the FY2012/2013 corporate bond
calendar, Consolidated Bank has been granted approval by the CMA for a KES 4 billion medium term
note. However, with the corporate bond market spreads as compared to treasuries expected to
remain small, our outlook for this segment remains less bullish.
Fixe
ed Income N
Note | July 2012
Money M
Market Analysis
Figure 1: Interest Rates during FY2
2011/2012
Figuree 2: Inflation efffects on T‐billls during FY201
11/2012
Source: CBK
K, D&B Databank
Source: CB
BK, D&B Databankk
Tig
ghtening shiftss the balance in
n the money ma
arket…The contractionary monetary policy has resulted in aa varied play on
n the interest
ratte front. In Figu
ure 1 above, ho
orizontal repos feature as the most expensive option of fun
nding with the h
highest interestt rate for the
maajor part of thee year, slacking off in the last ffew months as interest rates o
on the t‐bills alsso decline. The spikes in the in
nterbank rate
an
nd the horizontal repo rate ind
dicate periods of extremely tight and skewed liquidity in th
he market. We note that the shape of the
intterbank rate cu
urve and horizontal repo ratee curve are sim
milar until April, where the in
nterbank rates trend upwardss gently. We
beelieve that this iis as a result of the volumes on
n the horizontaal repos wearingg off during thiss part of the year. In the period Dec 2011 –
Feeb 2012, the rep
po rate was the
e lowest rate in the market. In the last month
h the repo rate outpaced the t‐‐bills by a whop
pping 751bps
sp
pread leading to
o severe under‐subscriptions in
n the t‐bill auctions.
Ba
attling with neg
gative interest rates… With th
he interest rates on the t‐bill frront fighting wiith low subscrip
ptions, we could
d see a slight
up
pturn in these rrates. Figure 2 aabove, shows tthat real t‐bill rrates have been
n under pressure for the 1st half of the year, dipping into
the negative agaiin in May 2012. With all inflattion signals poin
nting to furtherr decline in thiss measure, we expect the spreead between
no
ominal and reall rates to trend
d between ‐100
0bps to 300bpss. The higher sp
pread value sho
ould serve to attract higher flows into the
billls and bonds.
Figure 3: Interbank, CBK Window b
borrowing in FFY2011/2012
KES Millions
3000,000
2550,000
2000,000
Repo Volum
me
TAD Volu
ume
Repo Rate
TAD Ratte
35.0%
%
8
80,000
19%
%
30.0%
%
7
70,000
18%
%
KES Millions
3550,000
in
nterbank monthly tottal volume
monthly total volumee
C
CBK discount window
m
monthly wtd avg inter
bank rate
m
monthly wtd avg CBK o
overnight discount win
ndow rate
Figuree 4: Repo, TAD
D transactions iin FY2011/201
12
25.0%
%
20.0%
%
6
60,000
5
50,000
17%
%
16%
%
4
40,000
15%
%
1550,000
15.0%
%
1000,000
10.0%
%
5
50,000
5.0%
1
10,000
13%
%
0
0.0%
0
12%
%
Source: CBK
K, D&B Databank
3
30,000
2
20,000
14%
%
Source: CB
BK, D&B Databankk
Vib
brant interbank market…The interbank volu
umes seen in Figgure 3 above, aas compared to Figures 4 and 5
5 show that this market has
beeen steadily active over the year,
y
with volu
umes far surpaassing those off the horizontaal repo market.. Whilst we kn
now that the
co
omparison is not made on the same basis (interbank loans arre done on an o
overnight basis,, whilst the repo
o and horizontaal repos have
diffferent tenors),, we display figu
ures 3, 4 and 5 to show the sizze of the interbank market and
d its influence o
on other rates in the market
can be visible.
Fixed Income Note | July 2012
Figure 5: Horizontal Repo Transaction(HRT) in FY2011/2012
HRT Volume
Figure 6: HRT Volume, frequency according to borrowing tenor
Total Volume
HRT Interest Rate
8,000
120
18,000
30.00%
25.00%
4,000
20.00%
3,000
KES Millions
6,000
5,000
100
16,000
14,000
80
12,000
60
10,000
8,000
15.00%
40
6,000
2,000
10.00%
1,000
0
4,000
No. of Transactions
7,000
KES Millions
Frequency of Transactions
20,000
35.00%
20
2,000
5.00%
0
0
HRT Tenor (Days)
Source: CBK, D&B Databank
Figure 7: HRT Volume, frequency according to collateral tenor
10,000
9,000
80
80
8,000
70
70
7,000
60
8,000
50
6,000
40
30
4,000
20
2,000
10
0
0
60
6,000
50
5,000
40
4,000
30
3,000
20
2,000
10
1,000
0
0
Duration at Deal Time
Year Bills/Bonds
Source: CBK, D&B Databank
Frequency of Transactions
90
KES Millions
12,000
KES Millions
HRT Volume
Frequency of Transations
14,000
No. of Transactions
HRT Volume
Figure 8: HRT Volume, frequency according to bond duration
Source: CBK, D&B Databank
Preferences in horizontal repo transactions… For longer term borrowing besides the repos (sell‐buy backs) done on the NSE
platform, Figure 6 above shows that banks prefer borrowing over 14 days, followed by 7 days as opposed to longer term borrowing
from this window. In terms of the papers preferred, Figure 7 indicates that the 5 year, 10 year and 15 year record the highest number
of transactions. A trend appears to be emerging where papers over 10 years are used more frequently as the depth for longer term
papers increases. A 2 year time to maturity seems to also be preferable, with a skew towards the lower ended bond durations
according to Figure 8. We believe that this is due to the higher cash value obtained for these papers as the discounting effect lessens
towards maturity.
No. of Transactions
Source: CBK, D&B Databank
Fixed Income Note | July 2012
Primary Market Analysis
An increasing trend of budgetary deficits have led to a spike
in the issuance of domestic debt over the past 5 years
Figure 9: Issuance Patterns of Primary Bonds in the last 5 years
Offered
Accepted
Figure 10: Issuance Trends seen by Bond Maturities
Subscription Level
180,000
100,000
300%
160,000
90,000
80,000
250%
140,000
2‐5 Years
6‐10 Years
11‐20 Years
21‐30 Years
70,000
120,000
200%
100,000
KES Millions
KES Millions
Relatively lower interest rates ensued that longer duration
bonds were possible in FY2010/2011, but illogical for
FY2011/2012.
150%
80,000
60,000
100%
40,000
50,000
40,000
30,000
20,000
50%
20,000
60,000
10,000
0
0%
Source: CBK, D&B Databank
0
Source: CBK, D&B Databank
As per Figure 9 above, FY2010/2011 has recorded the highest domestic debt issuance, partly due to the tap issues with fixed
yields/coupons during the year that had no limits on the uptake. We also note that bond demand has outstripped supply for the
previous 4 fiscal years. Subscription levels had been higher in FY2008/2009 and FY2009/2010 before falling in the next fiscal year. This
was largely due to lowered subscriptions between April 2011 and December 2011. Subscription levels in the 1st half of FY2011/2012
were also affected as a result of banking institutions offering higher interest rates to fund their lending and other treasury related
activities which yielded higher returns than the primary bond market.
Bond uptake in FY2011/2012 fell by 28.7% from FY2010/2011. With Kenya trying to increase their debt duration to a longer term, the
CBK began issuing 25 and 30 year bonds in the FY2009/2010. According to Figure 10 above, a gap in the 6‐10 year issues is becoming
more pronounced as shorter dated issues and medium term issues (11‐20 years) have taken precedence in the debt structure. 53% of
the issuances in the last 5 years have been between the 2‐5 year, 18% between the 6‐10 year, 24% between the 11‐20 year and 5%
between the 21‐30 year issues. Whilst the bulk of the bonds in a lower duration keep financing costs to a minimum; it slows down the
deepening of the capital market in raising long term funds for treasury in addition to lowering liquidity of the market on the longer end
of the time spectrum.
Figure 11: Issuance Patterns of Primary Bonds in the last 5 years
Issue/Reopen
date
25‐Jul‐11
25‐Jul‐11
29‐Aug‐11
29‐Aug‐11
26‐Sep‐11
3‐Oct‐11
31‐Oct‐11
28‐Nov‐11
1‐Dec‐11
5‐Dec‐11
26‐Dec‐11
2‐Jan‐12
28‐Jan‐12
6‐Feb‐12
27‐Feb‐12
27‐Feb‐12
26‐Mar‐12
30‐Apr‐12
28‐May‐12
25‐Jun‐12
Tenure
Issue No.
Offer
(Years)
FXD2/2011/2(R3)
2
6,500.00
FXD2/2010/10(R2)
10
6,500.00
FXD2/2010/5(R2)
5
5,000.00
SDB1/2011/30(R2)
30
5,000.00
FXD3/2011/2
2
10,000.00
IFB1/2011/12
12
20,000.00
FXD3/2011/2 (R1)
2
10,000.00
FXD4/2011/2
2
15,000.00
FXD4/2011/2 (Tap)
2
IFB1/2011/12 (tap)
12
FXD1/2011/1
1
10,000.00
IFB1/2011/12 (tap)
12
FXD1/2012/1
1
10,000.00
IFB1/2011/12 (tap)
12
FXD2/2012/1
1
10,000.00
IFB1/2011/12 (tap)
12
FXD3/2012/1
1
10,000.00
FXD1/2012/2
2
5,000.00
FXD1/2012/5
5
3,000.00
FXD1/2012/10
10
5,000.00
TOTAL
Source: CBK, D&B Databank
Received
9,735.59
5,587.14
4,147.94
4,548.27
4,343.25
13,296.89
2,240.47
10,777.94
13,463.75
272.75
18,111.76
1,626.90
31,793.05
5,838.75
34,799.69
21,317.00
15,142.63
27,714.50
6,224.90
4,068.22
235,051.39
Performance
NCB
(%)
149.8%
678.88
86.0%
797.51
83.0%
226.68
91.0%
176.07
43.4%
159.69
66.5%
1,872.73
22.4%
181.06
71.9%
227.20
181.1%
317.9%
2,440.90
348.0%
2,525.60
151.4%
554.3%
207.5%
81.4%
1,411.05
1,418.60
1,270.60
113.00
Accepted at
FV (Ksh M)
3,680.05
3,112.73
997.14
2,484.99
639.20
11,625.75
240.76
9,980.05
13,463.75
272.75
11,104.21
1,626.90
14,942.35
5,838.75
10,516.00
21,317.00
15,038.39
6,468.64
4,979.59
445.69
138,774.69
Coupon Redemption Price per Ksh
rate (%)
Yield (%)
100.00 at YTM Maturity date
7.439
12.684
91.964
22‐Jul‐13
13.624
13.089
79.990
19‐Oct‐20
6.671
13.887
77.378
23‐Nov‐15
12.000
16.397
73.441
21‐Jan‐41
10.500
13.897
94.240
23‐Sep‐13
12.000
16.640
82.082
18‐Sep‐23
10.500
16.526
94.240
23‐Sep‐13
22.844
22.844
100.000
25‐Nov‐13
22.844
22.844
100.000
25‐Nov‐13
12.000
16.640
84.384
18‐Sep‐23
21.408
21.408
100.000
24‐Dec‐12
12.000
16.640
85.428
18‐Sep‐23
21.082
21.082
100.000
26‐Jan‐13
12.000
16.640
86.751
18‐Sep‐23
18.030
18.030
100.000
25‐Feb‐13
12.000
16.640
87.555
18‐Sep‐23
16.432
16.432
100.000
25‐Mar‐13
13.826
13.826
100.000
28‐Apr‐14
11.855
11.855
100.000
22‐May‐17
12.705
12.705
100.000
13‐Jun‐22
Fixed Income Note | July 2012
Treasury faces the music caused by a restrictive monetary policy, as domestic debt markets are unable to provide sufficient
funds to meet spending requirements accounted for by the budget deficit for FY 2011/2012
Figure 12: Tear Sheet for Domestic Borrowing in the debt and money markets for the Fiscal Year 2011/2012
T‐Bonds Redemptions
New Borrowing T‐Bonds
Amount Accepted
Net borrowing/(payout)
Jul‐11
2,594
13,000
6,793
4,199
Aug‐11
1,773
10,000
3,482
1,709
Sep‐11
12,998
10,000
639
‐12,359
Oct‐11
‐
10,000
241
241
Nov‐11
‐
15,000
9,980
9,980
Dec‐11
7,404
10,000
24,568
17,164
Jan‐12
9,982
10,000
14,942
4,961
Feb‐12
‐
10,000
10,516
10,516
Mar‐12
9,195
10,000
15,038
5,843
Apr‐12
‐
5,000
6,469
6,469
May‐12
2,368
3,000
4,980
2,612
Jun‐12
6,013
5,000
446
‐5,568
Total
52,327
111,000
98,094
45,767
Jul‐11
15,086
18,500
14,485
‐601
Aug‐11
29,882
24,000
16,908
‐12,974
Sep‐11
36,731
32,500
36,567
‐164
Oct‐11
21,367
40,000
35,155
13,788
Nov‐11
12,372
31,000
12,286
‐87
Dec‐11
42,404
31,000
20,863
‐21,540
Jan‐12
36,396
38,000
38,101
1,706
Feb‐12
16,943
31,000
43,363
26,421
Mar‐12
26,057
31,000
29,466
3,409
Apr‐12
32,092
35,000
33,724
1,632
May‐12
25,720
18,000
17,265
‐8,455
Jun‐12
15,068
18,000
9,101
‐5,967
Total
T‐Bills Redemptions
Actual T‐Bills Offered
Amount Accepted
New borrowing/(Net repayment)
TBills and TBonds
Total Redemptions
Total Borrowing Targeted
Total Accepted
Total New Borrowing
New Borrowing Cummulative
Jul‐11
17,679
31,500
21,278
3,598
3,598
Aug‐11
31,654
34,000
20,390
‐11,265
‐7,666
Sep‐11
49,729
42,500
37,206
‐12,523
‐20,189
Oct‐11
21,367
50,000
35,396
14,029
‐6,160
Nov‐11
12,372
46,000
22,266
9,893
3,733
Dec‐11
49,808
41,000
45,431
‐4,377
‐644
Jan‐12
46,378
48,000
53,044
6,666
6,022
Feb‐12
16,943
41,000
53,880
36,937
42,959
Mar‐12
35,252
41,000
44,504
9,252
52,212
Apr‐12
32,092
40,000
40,192
8,101
60,312
May‐12
28,088
21,000
22,245
‐5,843
54,469
Jun‐12
21,081
23,000
9,546
‐11,535
42,934
‐2,833
Total
42,934
Source: CBK, D&B Databank
How did the bonds perform compared to the bills? A squeeze in the monetary policy and heightened interest rates led to flight from money market instruments into debt
structures for the better part of the FY 2011/2012, paving a hole in the money market borrowing targets as per the budget for the previous year. The treasury bills subscriptions
were further exacerbated by intermittent liquidity in banks, and a preference for investing in the overnight market at the Central Bank and the interbank market yielded higher
returns – reason enough for banking institutions to avoid the bills.
Effects of putting a lid on inflation… To soak up excess liquidity from the market in order to keep the flyway inflation under wraps in addition to meeting its borrowing
requirements, the CBK stepped up its borrowing targets from September 2011 to April 2012 on the T‐bills front whilst attempting to minimize its interest payments during a high
interest rate regime by lowering its duration on the longer dated bonds arena. With liquidity being fairly tight in May and June 2012 (preference shown for high yielding repos and
newer longer term auction deposits, introduced June 2012) and t‐bill yields lower than in previous months, the Central Bank lowered borrowing targets for those months.
Did Treasury meet its targets for borrowing in the domestic debt market? Treasury had earmarked KES 83.65 billion in new borrowing in the domestic debt market for
FY2011/2012 as well as KES 35.85 billion for infrastructure related debt, the two totaling KES 119.5 billion. Figure 12 above shows that new borrowing for FY2011/2012
culminated to KES 42.9 billion for the domestic debt market and KES 40.68 billion raised from the infrastructure bonds summing up to KES 83.615 billion. This resulted in a
differential of KES 35.88 billion. During the year, Treasury drew down an overdraft of KES 25.4 billion from CBK largely during the earlier months of the year for working capital
requirements and redemption payments and we are unclear as to whether this has been in part or full. If unpaid this would bring down the deficit to KES 10.48 billion.
Syndicated loan to the rescue…A picture of a gaping differential in budgeted forecasts became evident by the end of the first half of the fiscal year and started the ball rolling to
obtain a $600 million syndicated loan (approximately KES 51 billion) at LIBOR plus 475 basis points from three international banks substituting for the deficit in the domestic
borrowing. The first tranche of the loan arrived in the 1st week of June 2012 of $240 million, with the remainder (approx KES 31 billion) arriving in the 4th week of June. Due to late
arrival of the funds in the last fiscal year, we believe that this could spill over into the current fiscal year.
Fixed Income Note | July 2012
Redemptions paint an emerging picture of higher liquidity in the 3rd and 4th quarters of FY2012/2013 subject to
consistent rollovers from the 91D and 182D, albeit colored by other money market instruments available to
financial institutions only
24000
22000
20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
Source: D&B Databank
Figure 14: T‐bond redemptions in FY 2012/2013
364D Redemptions
182D Redemptions
91D Redemptions
KES Billions
KES Billions
Figure 13: T‐bill redemptions in FY2012/2013
24000
22000
20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
Source: D&B Databank
Where do debt redemptions stand at in FY2012/2013? As displayed in the Figure 13 above, redemptions for the 91D T‐bill are only
for the first three month, 182D bills for the first six months and 364D bills for the year, as they stand at this moment in time. Note
that the prior two T‐bills, may be rolled over during the year severally. Total redemptions for T‐bills for the year 2012/2013 stand at
KES 120.76 Billion as at the beginning of the year (July 2013). T‐Bond redemptions as shown in the Figure 14 above, total KES
155.67 Billion for FY 2012/2013.
Connect the dots... The trend above display different liquidity strains/surpluses in each month. Our preliminary analysis shows
tighter liquidity during the months of October and November of 2012. The strain arises as a result of lower expected subscriptions in
t‐bills in the months of July, August and September in the short term, which will affect redemptions in October and November which
are relatively lower than the other months during 1st half FY2012/2013. The above redemption figures will not change from any new
bond maturities (typically longer than a year). However, both the bills and bonds are subject to rediscounting at the CBK and
therefore may be retired at an earlier date than shown in Figures 13 and 14.
Key inferences from redemptions… Bond redemptions in FY2012/2013 are 197% higher than those in FY2011/2012 at KES 52.3
billion. According to the FY2012/2013 budget, KES 170.5 billion will be raised through rollovers of redemptions. At present with
both bond and bill redemptions in FY2012/2013 equate to KES 276.4 billion, we think that is will be fairly easy to achieve the
rollover figures aforementioned in the budget. However, we draw the following conclusion from the differential of KES 105.9 billion
that will not be rolled over: liquidity in the financial system will increase leading us to the belief that whilst liquidity was tightened to
a stranglehold in the previous year, maintaining a restrictive policy in the current year will be all the more difficult. Our worry is that
this could potentially lead to a pullback on the inflation targeting of below 9%. However, the CBK are one hand up this year with new
ammunition in the form of Term Deposit Auctions (TADs), a money market instrument which CBK can use as a sponge at interest
rates of varying degrees to soak up liquidity with the proviso that it will yield higher returns than the interbank market at the time.
However, it could affect subscription levels for t‐bills especially on the lower end (91D and 182D) as the instrument is seen to provide
higher yields with the possibility of being rolled over if liquidity is deemed to be high. We don’t expect bond subscriptions or yields to
be highly affected by the TADs. With the CBK being extremely vigilant on the currency front after last year’s debacle in addition to
buffered foreign reserves, we don’t expect returns from currency trading to play any interference in the primary bond yields arena.
Further endorsement to our belief on interest rates…With regards to new debt borrowing, Treasury intends to raise KES 106.7
billion for FY2012/2013 – a 360% increase on the previous year’s new domestic debt mobilization. Spill over from FY2011/2012 of
approximately KES 20‐30 billion (from syndicated loan), the amount to be raised domestically falls to KES 76‐86 billion. Taking into
consideration access to an overdraft to cover working capital deficiencies as well as the additional liquidity from redemptions and
external financing, we come to the conclusion that the targeted amount could be raised without much difficulty. We think that the
excess liquidity expected within financial institutions will likely be used to bulk up their trading books which have been sorely
affected last year. All these factors advocate for falling interest rates, as options to park excess cash are likely to favor bonds,
especially longer term bonds which are currently in high demand by institutions (a typical case of high demand leading to lowered
interest rates).
Fixed Income Note | July 2012
Secondary Market Trading
The yield curves (YC) began the year with a gently upward sloping
trend (orange line), moving to a flatter line on the short and medium
term but still upward sloping on the longer end by September 2011
(purple line) as a result of a signal in a 75bps rate hike in the CBR to
7% in September 2011.Thereafter, the reopening of a 2 year bond in
the primary market, raised yields for most 2 year issues to levels of
bond issues of up to 20 years. The next quarter saw an inversion in
the yield curve as the CBR was increased in October 2011 by 400 bps
to 11% which was quite unexpected but necessary for taming
inflation and again in November 2011 by 550 bps to 16.5%. The YC
for October 2011 (black line) is clearly an outlier. This curve took the
400 bps hike on the CBR literally and took up the rates by the similar
levels. The additional hike in November coupled with CBK’s
intentions at the time of issuing only short dated papers change the
YC shape sharply again. Another 2 year issue in November spiked the
yields of the 2 year to new heights, lowering demand and thus yields
in the medium term, with longer end yields recovering to post‐
October 2011 levels. The YC remained in a ‘U‐Shape” during the next
quarter, albeit with yields abating on the shorter end. By the end of
June 2012, the YC dropped down 400 bps on the short end and had
similar yield levels as July 2011.
Figure 15: NSE implied yields for T bonds within the year
Source: NSE, D&B Databank
Bonds on the short end of the spectrum have been trading
at a higher spread than the medium or longer dated bonds
The wildly fluctuating spreads between the bonds
indicating twists in the yield curve over the year
Figure 16: NSE implied yields for T bonds within the year
25.00
23.00
2 Year T‐Bond
5 Year T‐Bond
15 Year T‐Bond
20 Year T‐Bond
Figure 17: Spreads between the T Bonds yields
500
400
300
200
100
0
‐100
‐200
‐300
‐400
‐500
‐600
‐700
‐800
‐900
10 Year T‐Bond
21.00
19.00
17.00
15.00
13.00
11.00
9.00
7.00
Source: NSE, D&B Databank
10 Year ‐ 15 Year Spread
15 Year ‐ 25 Year Spread
5 Year ‐ 10 Year Spread
2 Year ‐ 5 Year Spread
Source: NSE, D&B Databank
A steep increase in yields from September to December 2011, as per Figure 16, occurred as a result of: i) the increase in the CBR rate to
18%, ii) shortfall in domestic borrowing and iii) high treasury requirements at that point in time. The non‐issuance of medium or longer
dated bonds since September 2011 until May 2012 sent the 2 year bond yield soaring high; whilst yields for other bonds fell in
December 2011 liquidity was diverted to the 2 year. Since then the 2 year yield has been falling in steps, trending towards other bond
yields which have remained more or less flat until February 2012. With inflation trending downwards rapidly and lowered subscriptions
and uptake for local debt as a result of the inflow of the $600 million offshore loan, all other bond yields have been falling softly. By the
end of the year, bond yields had corrected with a gently upward sloping yield curve.
As seen from Figure 17 above, wider spreads on the short end of the yield curve (2 and 5 year) have had a clear advantage over longer
issues during the year, especially the 2 year as its spread against the 5 year bond reached highs of 858 bps. On the longer ended bonds,
the 15 year had a yield advantage over the 25 year. From December 2011 to March 2012, the CBK only issued/re‐opened 1 year bonds
and the spreads began to narrow. Supply on the longer ended bonds and medium term bonds were very thin during the year which put
downward pressure on the yields as fund managers lost out due to higher demand. In April, it issued the 2 year bond which saw the
spread on the 2 year against other bonds widen. The issuance of a 5 year bond, with a drop in yields saw the yield curve rising upwards
once again with the spreads between the longer dated and shorter dated bonds on the positive arena.
Fixed Income Note | July 2012
Figure 18: Top 20 bonds traded in FY2011/2012
The Figure 18 on the right portrays trading including
Sell buy Backs (SBBs). Trading on the IFB 5 is the last
year has been most rampant partly due to the high
yield and coupon obtained on the bond, its longer
duration compared to all the shorter duration bonds
issued during the year. High trades for this bond were
recorded in the last quarter of the year as seen in
Figure … below.
Source: CBK, D&B Databank
Besides the FXD 4/2011/2, FXD 2/2011/2, FXD
1/2011/5, FXD 2/2012/1 and FXD 1/2012/1, the rest of
the bonds are all over 10 years, indicating that demand
for longer duration bonds is high and outstrips supply in
the primaries.
Figure 19: Secondary Bond Trading by Volume
Fixed Income Note | July 2012
Figure 19: Secondary Bond Trading by Volume in Millions (cont)
Source: CBK, NSE, D&B Databank
Bond volumes in the 1st quarter of FY2011/2012, comprised of 29.8% of the total volume for the year, followed by the 4th quarter with
26.25%, 22.96% in the 3rd quarter and 20.9% in the 2nd quarter. Again, we believe that in the second and third quarters, trading was
subdued due to flows shifting into higher yielding banking deposits and shortage of supply in the secondary market as returns on most
bonds traded went into the negative territory.
Fixed Income Note | July 2012
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