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Kenya: AIG Launches Tool to Track Trends in Bond Markets
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Business Daily (Nairobi)
29 April 2008
Posted to the web 29 April 2008
James Makau
AIG Investments has launched the first benchmark bond index allowing investors and fund managers to track the performance of the fixed income instruments at the Nairobi Stock Exchange (NSE).
The AIG Government Bond Index is broad-based and is used to represent fixed rate Treasury bonds traded in Kenya. A Bond Index is a tool that aims to monitor performance of a specified basket of fixed income securities.
This comes as investor appetite for longer dated securities at the NSE continues to gain momentum in the bid to maximise returns and spread risks.
"Since 2000, we have seen a significant rise in debt, with outstanding Treasury bonds accounting for over 70 per cent of government domestic debt. This follows the re-launch of the government bond programme that saw the introduction of fixed rate bonds," said Mr Peter Wachira, a senior investment manager at AIG Investments.
Looking at the structure of the Kenya Domestic Debt since 2000, analysts say the composition of debt has since changed .In June 2000, 80 per cent of domestic debt comprised T-bills. The time to maturity of government domestic debt averaged four months. The Kenya Government re-launched the bond programme in August 2002 to lengthen the maturity profile,
Secondary bond turnover has doubled since 2002. Analysts say that lower, stable interest rates and higher liquidity support secondary bond trading.
Market players have welcomed the formation on the bond index, which is expected to be a tool of trade for institutional investors. "We finally have a uniform pricing of indices," says James Murigu, managing director at Suntra Investment Bank which is a major player in the bond market.
The total-return index is considered a more accurate measure of actual performance and will apply to selected Kenya government fixed rate Treasury bonds with a maturity period of more than 13 months.
It has also lengthened the maturity profile to the current duration of 3.8 years by issuing longer dated bonds.
Most bond market players have their own internally constructed indices that allow them to gauge the performance of their bond investments.
But without a widely accepted benchmark, it has been difficult for the bond market players to track the performance of their portfolios against the market. It is only recently that the NSE began reporting daily bond market reports while constructing a weekly yield curve allowing investors and fund mangers to benchmark their debt securities.
A yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.
Last year recorded the highest secondary bond turnover since the re-launch of the bond programme.
The first quarter of 2008 saw secondary bond activity record the highest quarter on quarter turnover.
Investors have for years relied on the T-Bill as the primary benchmark for fixed income securities. The rise or decline of interest rates (read Treasury bills rates) has a direct impact on the bond market. This has spiral effect in the pricing if corporate bonds instruments and development of bond market in general.
The Kenyan bond market is currently showing considerable appetite for medium to long-term maturity bonds. Market players say this can be attributed to the relative volatility of bonds at the shorter end of the yield curve whose value is a factor of the trends in the treasury bills (91-day and 182-day).
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Government bonds account for more than 70 per cent of domestic debt, hence, the need to benchmark fixed income portfolios with an appropriate index or composite that is more representative of the market," says Vincent Ntalami, investment manager at AIG .
Changes in interest rates may also be captured by movements in the bond index. It allows investors to measure effects of interest rate movements on their bond portfolios.
Currently the longer dated bonds are offering more attractive returns and higher periodic cash flows.
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