14 July 2014

Kenya: The Eurobond Gets Off to a Flier

On Friday, the recently issued 10 year dollar denominated Government of Kenya bond reached a record low yield of 6.195 per cent. This bond was sold at a yield of 6.875% and a price of 100. Buyers have so far bagged close to a 5 point gain which in the bond world represents a spectacular return in such a short space of time.

The $2 billion worth of Eurobonds - the largest for an Africa sovereign excluding South Africa - spread over two tranches and over four times oversubscribed, with an order book of $8.8 billion, were sold you will recall less than a month ago. Five point gains on a bond in less than 20 trading sessions is kind of legendary and the President Uhuru Kenyatta and his Cabinet Secretary Henry Rotich should see the price action as strong confirmation of their macro-economic credentials.

I prefer price action over words and the price action has been breath taking. It would be churlish not to give credit to madam Lagarde's IMF which institution has invested heavily in the Kenya and might well have sprinkled some fairy dust.

However, nothing goes up forever and investors might look to bag gains because we are now entering the bird in the hand territory. The Kenya Shilling has also proved real resilient and my Friend on Twitter @cedricmuhammad characterised the Shilling as "The Teflon Shilling" which characterisation deserved an A Star.

The Shilling has held and bounced off two and a half year lows at 88.20 on several occasions over the last few weeks. The Kenya Shilling whilst down about 1.5 per cent versus the Dollar in 2014 remains only behind the Malawi Kwacha [which has rallied +8.8 per cent over the same period] when you look at the African Currency League Table.

Look at John Dramani Mahama's Ghana @JDMahama, whose macro-economic credentials have been shredded and the currency has now fallen 30 per cent and off a cliff in 2014. Teflon Shilling indeed and another powerful and bullish signal in the noise. In fact, I have a 48 month forecast of 60 for the Shilling versus the Dollar. I tested my forecast in a seminar I was hosting for the Mandharini Property development in Kilifi just to test the reaction. I will return to that forecast in the near future because it's going to scramble a lot of models, I am sure.

Returning to the Eurobond price action, that price action will surely be a catalyst for wrestling local interest rates lower. The spread between GOK USD borrowing rates and GOK local currency rates is like an elastic band that is now stretched too far and will snap back by way of local Kenya Shilling interest rates easing.

The net liquidity add of $1.4 billion net is yet to transmit through the system and this will guide rates lower. You will notice that Kenya Commercial Bank [who last week launched an important collaboration with Safaricom at the intersection point of technology and finance targeted at SME's [one million within 12 months according to @BobCollymore] under the name of Biashar@smart] now have mortgage rates that carry a 12 per centhandle.

I have followed markets from the time I was nine and in Mombasa and used to wait for my dad's Economist which would turn up every Tuesday via Wason's. What I have learnt over these near enough four decades, is that when our mortgage rates reach single digits, we are going to see the next big rally in property prices. The move into single digits is a tipping point and I have seen it happen all over the world.

Property prices rose more than threefold over the last decade in Kenya. I told the Mandharini Property seminar that I am predicting a similar outcome over the next decade.

What about the bifurcation I hear everyone asking as I write this in the early morning in the wonderfully luminescent green that is Kiambu at this time of year. It is a fact that the "Coastal Insurgency" [Edmund Blair via Reuters] has gained in intensity and in virulence. I wrote on Sep tember 3, 2012 that:

"My concern remains that what appear like uncorrelated spikes and paroxysms of violence conflate, become more broad based and amplify."

This naturally remain a very clear and present danger.

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