Business Daily (Nairobi)
James Makau
17 January 2008
The valuation of bonds is expected to decline as investors scramble for short-term papers in an uncertain political environment, analysts said.
Such an outcome is expected to impact on the Government's use of its borrowing instruments and interfere with the debt restructuring programme that started two years ago in favour of long term borrowing.
Ordinarily, the Government sells Treasury Bills in the local market money market at a set interest rate for its short term needs but has in the recent past been scaling down its activity in this market in favour of long term debt.
Short term debt is, however, expected to come at a high price to the government because the interest charged will have to bear a risk premium.
"We've seen a slow start in bond trading since the year began. If this unrest persists the Government may be hard-pressed to raise the money market rates," said Ronald Olembo.
Mr Olembo is a fixed income analyst at CFC Financial Services.
But bond holders today are faced with a dilemma.
The two enemies of the bond market, higher interest rates and inflation, are looming large in Kenya in the wake of the unrest in the country following a disputed general election.
Lower liquidity and increased borrowing by the government are likely to put pressure on the interest rate as investors who are more aware about the risks involved seek a higher premium for investing in government securities.
'The current political uncertainty has reminded investors the risks involved of long term bonds," reckons Joshua Njiru, head of research at Old Mutual Asset Managers.
Mr Njiru reckons that because of the awareness of risks, investors - especially in the long term dated securities - are likely to demand more premiums for their investments.
A rapid solution to the current political impasse will have an impact on the bond market because most bonds investors are long term investors save for the trading activity in the secondary bond market.
Commercial banks, insurance companies, parastatals, fund managers, and some foreign investors are the main investors in the bond market.
Last year, bouts of risk aversion in jittery markets triggered the bond yield decline in the global bond market.
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