Kenyan Bond Yields at 14-Month Lows as Rate Cap Hurts Stocks

  • Investors flocking to safety of debt as share index tumbles
  • Bonds return 6.7 percent this quarter as banks boost holdings

Yields on Kenyan government bonds dropped to the lowest in 14 months after a new law capping interest rates charged by commercial banks sparked a stock market slump, sending investors scurrying for the safety of fixed-income securities.

Kenyan shilling debt has returned 6.7 percent this quarter, compared with the 3.9 percent average return of high-yield local-currency sovereign debt monitored by Bloomberg. The benchmark stock index plunged 9.2 percent in the period. Average yields on Kenyan notes dropped to 13.12 percent on Monday, the lowest since Aug. 20 and down from a record 16.41 percent in October, according to Bloomberg indexes.

“Yields on government securities are falling because everyone is trying to buy them,” Alexander Muiruri, head of fixed income at Nairobi-based Kestrel Capital, said via e-mail.

Kenyan President Uhuru Kenyatta’s government last month capped lending rates at 400 basis points above the benchmark central bank rate, currently at 10.5 percent. With profitability of lenders under threat, investors dumped bank stocks, sending the Nairobi Securities Exchange All Share Index to a near-three-year low on Sept. 5. Then of the 11 lenders listed on the exchange have dropped since Aug. 24, when the law was enacted.

Banks are the biggest buyers of government bonds, holding 54.4 percent of the 1.8 trillion shillings ($17.8 billion) of total debt, according to central bank data. They have increased holdings by 10 billion shillings since the law was passed.

Yields on benchmark securities due January 2024 dropped eight basis points on Monday to 13.52 percent. The Share Index gained 0.5 percent by 12:42 p.m. in Nairobi, the capital.

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