Fixed income investments

By / June 22, 2015



fixed-income-investments

Fixed Income

We continue to hold our April recommendation that investors stay biased towards short duration fixed income instruments.

Treasury bill auctions continued to be undersubscribed, with a 23.7% overall subscription this week after a 47.7% subscription last week; undersubscription is due to tight liquidity in the money markets as a result of corporate tax payments and mop-up activity by the CBK to support of the shilling. However, investors continue to prefer short-term investments, as seen in the 91-day T-bill subscription, which had Kshs 1.1 bn subscribed versus Kshs 1 bn offered.

Despite the recent 150 bps rate increase by MPC, yields remained relatively unchanged at 8.3%, 10.6% and 11.1% for the 91, 182 and 364-day papers, respectively. The fact that yields have not changed despite a 150 bps MPC rate increase is an indicator that the Central Bank Rate (CBR) has not been fully accepted by the market as a policy tool hence raising doubt about its effectiveness as a monetary tool.

Despite a depreciating dollar in the global markets, the Kenya Shilling still depreciated by a further 1.0% against the dollar during the week to close at Kshs 98.2 on the back of dollar demand from the manufacturing sector for imports. We expect further weakening in the shilling driven by end-month demand by importers, however this will be cushioned by Central Bank’s activity in the market and a weaker dollar given expectations of a more prolonged rate increase timeframe by the Fed.

In a bid by investors to diversify their fixed income portfolios into corporate bonds, Centum Investment’s 5-year, Kshs 6 bn corporate bond received bids worth Kshs 8.31 bn, a 38% oversubscription. The equity-linked note (“ELN”), which will offer investors higher returns based on the performance of the company’s net asset value in addition to the 12.5% coupon, received subscription worth Kshs 3.5 bn (42%), while the 13.0% fixed coupon portion received subscription worth Kshs 4.8 bn (58%). The 42% ELN subscription is higher than the last time Centum offered an ELN, a clear indication that investors are seeking higher risk-adjusted returns and willing to look at unconventional investment instruments.

We expect yields on government securities to increase due to a number of factors:

  • Increase in the CBR, a portion of which will eventually pass through to market rates
  • Increased government borrowing in the domestic market to fund the 2015 / 2016 budget
  • Tight liquidity in the market.

House View: Our view is that in the short term, investors shy away from equities and long dated fixed income, because of stretched valuations and risk of rate increases, respectively; and park money in high yielding short dated instruments and money markets as they await better entry points.





More Articles From This Author








Other Related Articles










SOKO DIRECTORY & FINANCIAL GUIDE

ARCHIVES

2019
  • January 2019 (256)
  • February 2019 (216)
  • March 2019 (188)
  • 2018
  • January 2018 (291)
  • February 2018 (220)
  • March 2018 (279)
  • April 2018 (226)
  • May 2018 (240)
  • June 2018 (178)
  • July 2018 (257)
  • August 2018 (250)
  • September 2018 (256)
  • October 2018 (287)
  • November 2018 (286)
  • December 2018 (187)
  • 2017
  • January 2017 (183)
  • February 2017 (195)
  • March 2017 (207)
  • April 2017 (104)
  • May 2017 (169)
  • June 2017 (206)
  • July 2017 (190)
  • August 2017 (196)
  • September 2017 (186)
  • October 2017 (235)
  • November 2017 (253)
  • December 2017 (266)
  • 2016
  • January 2016 (167)
  • February 2016 (165)
  • March 2016 (190)
  • April 2016 (143)
  • May 2016 (246)
  • June 2016 (183)
  • July 2016 (271)
  • August 2016 (250)
  • September 2016 (234)
  • October 2016 (191)
  • November 2016 (243)
  • December 2016 (153)
  • 2015
  • January 2015 (1)
  • February 2015 (4)
  • March 2015 (166)
  • April 2015 (109)
  • May 2015 (117)
  • June 2015 (121)
  • July 2015 (150)
  • August 2015 (157)
  • September 2015 (189)
  • October 2015 (171)
  • November 2015 (174)
  • December 2015 (208)
  • 2014
  • March 2014 (2)
  • 2013
  • March 2013 (10)
  • June 2013 (1)
  • 2012
  • March 2012 (7)
  • April 2012 (15)
  • May 2012 (1)
  • July 2012 (1)
  • August 2012 (4)
  • October 2012 (2)
  • November 2012 (2)
  • December 2012 (1)
  • 2011
    2010
    2009
    2008
    2007
    2006
    2005
    2004
    2003
    2002
    2001
    2000
    1999
    1998
    1997
    1996
    1995
    1994
    1993
    1992
    1991
    1990
    1989
    1988
    1987
    1986
    1985
    1984
    1983
    1982
    1981
    1980
    1979
    1978
    1977
    1976
    1975
    1974
    1973
    1972
    1971
    1970
    1969
    1968
    1967
    1966
    1965
    1964
    1963
    1962
    1961
    1960
    1959
    1958
    1957
    1956
    1955
    1954
    1953
    1952
    1951
    1950