Domestic Bonds

Kenyan bonds face depressed yields as inflation and high interest rates hit the market


East African banking institutions may hold troubled government bonds as the region’s fixed income market is hit by inflation, central bank rate hikes and uncertainty surrounding the disputed presidential election in Kenya. At the height of the Covid-19 pandemic in 2020, regional banks flew to the so-called “safe havens” of government bonds and increased their holdings of Treasury securities at the expense of private sector lending to secure themselves. protect against payment defaults.

However, hit hard by runaway inflation and an upward revision of interest rates by the region’s central banks to stem the high cost of living, the bond market is going through a dreadful period with painful losses for investors.

“Rising interest rates will lead to losses in bank bond portfolios. The impact will vary from bank to bank depending on the size of bond trading activity,” Ken said. Gichinga, chief economist at Mentoria Economics.

The interest rate on Kenya’s 10-year Treasury bills increased by 1.42 percentage points over the past 12 months to reach 13.98% on August 24, 2022, from 12.56% on August 29, 2022. last year, which implies a decline in the market value of these bonds. And for the banks, this is not good news since the drop in the value of their bond portfolio negatively impacts their profitability, when they carry out a stock market revaluation of investments.

Eric Musau, director in charge of research at Standard Investment Bank, said that although banks are facing losses on their portfolio of long-term bonds, the rise in interest rates has not been too drastic. and inflation could moderate sooner than expected.

“Banks hold instruments that have different maturity profiles, and so as the yield curve rises, they can get a higher yield as their current holdings mature. Older ones will see losses,” said Mr. Musau Central bank data shows that Kenyan banks hold more than Ksh 1.83 trillion ($15.37 billion) in government bonds, which is around 30.5% of total assets estimated at $50.58 billion by December 2021.


Bond prices move inversely to interest rates, implying that when rates rise, bonds lose value and when rates fall, bonds increase in value. Falling bond values ​​are the result of rising interest rates accelerating in bond markets as central banks try to contain inflation induced by rising oil prices and supply disruptions due to the Russian-Ukrainian war.

Reginald Kadzutu, managing director of asset management company Amana Capital Ltd, however, said the CBK policy rate had a very weak transmission mechanism and did not reflect the price borrowed by the government.

“Nevertheless, most banks have very few bonds held for trading, the rest are locked until maturity,” Kadzutu said.

In Uganda, the 10-year bond yield rose to 14.1% in the three months to June 2022 from 13.9% in the three months to March.

while bond yields on 15- and 20-year maturities rose 60 basis points to an average of 15.5% from an average of 14.9% over the same period, according to the Bank of Uganda (BoU).

In Tanzania, treasury bills made up 82.7% of the government’s domestic debt in June, according to the Bank of Tanzania (BoT).

Last year, holdings of government securities by Kenyan banks increased to 30.5% of total assets from 29.6% in 2020, while loans and advances to the private sector as a share of net assets fell to 48.5% from 49.2% during the same period.

According to the CBK, overall interest rates on domestic government securities recorded marginal increases in 2021, extending into the first half of 2022.

But investments face a tough ride with rising interest rates putting lenders’ profitability at risk

According to the CBK, raising policy rates to stem inflation is expected to drive up interest rates, leading to high borrowing costs.

Just two weeks ago, Rwanda’s central bank raised its lending rate by 100 basis points, the biggest increase in recent years, to six (6) from five (%) to stem rising lending. inflation which reached 15.6% in July against 12.6% the previous month. , well above the average rate of 0.8% recorded last year.

“This (inflation) is a big concern for us. We are talking to other government agencies to get involved. Inflation is expected to remain elevated over the next three quarters and start to decline in the second half of 2023 when headline inflation converges towards the 5% benchmark,” said John Rwangombwa, Governor of the National Bank of Rwanda.

During the second quarter (April-June) of this year (2022), the Kenyan government issued seven treasury bills aimed at raising Ksh 222.71 billion ($1.87 billion), but fell short of the target of Ksh 19.85 billion ($166.8 million), only managed to raise Ksh 202.86 billion ($1.7 billion), according to data from the Capital Markets Authority. Turnover in the corporate bond market also fell to Ksh 11.87 million from Ksh 358.5 million in the same period last year.