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Kenya Bond Yields Drop on Rate Cut Bets as Inflation Slows

Kenyan Central Bank Governor Njuguna Ndung’u
Kenyan bonds are rallying, pushing down yields to a record, on speculation that central bank Governor Njuguna Ndung’u will follow the first interest rate cut in 18 months with further reductions as inflation slows. Photographer: SeongJoon Cho/Bloomberg

Kenyan bonds are rallying, pushing down yields to a record, on speculation that central bank Governor Njuguna Ndung’u will follow the first interest rate cut in 18 months with further reductions as inflation slows.

Yields on Kenya’s 12.705 percent shilling notes due June 2022 have dropped 157 basis points, or 1.57 percentage points, to 12.63 percent, their lowest since they were sold in June, according to data compiled by Bloomberg. Yields on 11.855 percent securities due May 2017 are down as much as 38 basis points this month to 12.44 percent, the lowest since May 28.

Inflation in the $34 billion economy, East Africa’s largest, slowed for an eighth month in July to 7.7 percent, the Kenya National Bureau of Statistics said on July 31. Ndung’u reduced the benchmark lending rate by 1.5 percentage points to 16.5 percent on July 5 to help boost the economy, which grew 3.5 percent in the first quarter, the slowest pace in two years. The Central Bank of Kenya’s next monetary policy meeting is scheduled for Sept. 5.

“The next rate decision should see the monetary policy committee take a bold step,” Fred Mweni, chief executive officer of Nairobi-based Tsavo Securities Ltd., said in a phone interview on Aug. 10. “Key macro-economic indicators show that the central bank should slash its benchmark rate.”

While Kenyan yields are falling, they are high relative to South Africa, where rates on the government’s 6.75 percent securities due March 2021 have averaged 7.6 percent this year, reaching a record low of 6.48 percent on July 20. South Africa’s $408 billion economy is sub-Saharan Africa’s largest.

Yields Tumble

Yields in emerging market bonds are tumbling as Europe’s worsening debt crisis prompts investors to seek the safety of government debt, pushing lower yields in some developed markets to near-zero. In neighboring Uganda, borrowing costs are also coming down as inflation slows, with yields on the nation’s 10.75 percent notes due January 2017 falling 99 basis points to 14.41 percent through Aug. 10, according to Standard Chartered Plc.

Kenya’s inflation rate surged to a record 19.7 percent in November after a drought caused food prices to soar. The central bank boosted its main lending rate by 12 percentage points last year to curb inflation and bolster the currency after it slumped to a record low of 106.75 per dollar on Oct. 11. The shilling has strengthened 21 percent since its worst level to trade at 84.10 as of 9:28 a.m. in Nairobi. The country’s interbank lending rate has declined 17 percentage points this year to 10 percent on Aug. 10.

All those factors give the central bank the room to lower rates to 12.5 percent at the next meeting, Tsavo’s Mweni said. Yields on Kenya’s 2022 notes dropped nine basis points to 12.65 percent by 9:32 a.m. in Nairobi today while rates on its 2017 bonds declined three basis points to 12.5 percent.

Trading Surges

Trading in local Kenyan debt also is rising. The volume of bonds traded on the Nairobi Securities Exchange surged to a daily average of 5 billion shillings ($59 million) last week, compared with 1 billion shillings the prior week, according to Samuel Maikweki, a fixed-income trader at Nairobi-based Sterling Capital Ltd.

“The fall in inflation has elicited positive responses from the secondary securities market, spurring investor activity,” Duncan Kinuthia, a trader at Nairobi-based Commercial Bank of Africa Ltd., said by phone. “The prospects are good.”

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