Ayearinreview:Mercurialbehavior inthe

fixedincomemarketistheremoretofollow?

KenyanFixedIncomeMarketAnalytics

July2012

(MembersoftheNSEsince1954)
th
10 Floor,PensionTowers,LoitaStreet
P.O.Box4539600100Nairobi,Kenya
Tel:+254203240000Fax:+25420218633
Website:www.dyerandblair.com

Contacts:ResearchDepartment+254203240130
Analyst:PoonamVorapoonam@dyerandblair.com

The Kenyan fixed income market has grown at an unprecedented pace in the last few years,
drivenlargelybydeliberateeffortsbythegovernmenttodeepenthemarketonthesupplyside.In
thisreport,wereviewtheprogressinthemarketforthelastyear,andprovideourthoughtsgoing
forward.
Bonds:Demandforlongertermissuances
While issuances in FY2011/2012 have fallen from the levels recorded in the previous year, the
government initiated fiscal consolidation and diversified its sources of funding away from the
domesticmarket.Withthemarketstarvedoflongertermissuancesforthepastyear,demandfor
longerdatedbondshavegrownasinstitutionsseektoincreasethedurationoftheirbondbooks.
Intermsofthedirectionofthebondyields,ourbasecaseforecastisadownwardshiftintheyield
curve with a flattening bias in the short to medium term moving downwards on the longer term
issuances,aswethinkthatmostofthesupplyforFY2012/2013willlikelybemorefocusedonthe
medium and longer end of the curve, cemented by the 150 bps cut in the base interest rate to
16.5% by the Monetary Policy Committee (MPC). Accordingly, amidst an ongoing tug of war
betweenfavorablebondmarketenvironmentsandhighpriceburden,yieldsshouldremainwithina
limitedrangeovertheshortterm.
With the inflation trending downwards steadily and factors contributing to core inflation such as
nonfoodandnonfuelbasedinflationedgingdownwardsintheshortterm,expectationsoffurther
baseratecutswillshapeup,causingyieldstodeclinefurther.Weexpectfurtherbaseratecutsof
between300450bpsintheupcomingyear.
TradingintheBondsMarket
We believe that the initial 150 bps cut in the base rate is expected to boost up volumes on the
secondarybondmarket,withinvestorsseekingtolockinhigheryieldsintheexpectationofbuilding
upoffurthercutsinthebaserate.WiththeMPCchangingtheironcemonthlymeetingstooncein
2months,thegapbetweenthemeetingsislikelytospurhighsubscriptionsintheprimarymarket
especially if longer dated bonds are in the offing. In the short term, we also expect an ease in
liquidityduetohigherredemptionstoaugmenttradingvolumes.
CorporateBondOutlookstilldull
FY2011/2012,thissegmentofthebondmarketremainedquiet.Theonlycorporatebondthatwas
listedwastheShelterAfriqueKES2.5billionfloatingratenoteinSeptember2011,accountingfora
meager1.8%oftotalamountraisedingovernmentbondslastyear.Highinterestratesduringthe
yearhavecrowdedoutmoreissuancesofcorporatebondsascompanieslookforothermeansof
fundingsuchassubordinateddebtorfundingthroughequity.FortheFY2012/2013corporatebond
calendar,ConsolidatedBankhasbeengrantedapprovalbytheCMAforaKES4billionmediumterm
note. However, with the corporate bond market spreads as compared to treasuries expected to
remainsmall,ouroutlookforthissegmentremainslessbullish.

Fixe
edIncomeN
Note|July2012

MoneyM
MarketAnalysis
Figure1:InterestRatesduringFY2
2011/2012

Figuree2:InflationefffectsonTbilllsduringFY201
11/2012

Source:CBK
K,D&BDatabank

Source:CB
BK,D&BDatabankk

Tig
ghteningshiftssthebalancein
nthemoneyma
arketThecontractionarymonetarypolicyhasresultedinaavariedplayon
ntheinterest
rattefront.InFigu
ure1above,ho
orizontalrepos featureasthe mostexpensiveoptionoffun
ndingwiththeh
highestinteresttrateforthe
maajorpartoftheeyear,slackingoffinthelastffewmonthsasinterestrateso
onthetbillsalssodecline.Thespikesinthein
nterbankrate
an
ndthehorizontalreporateind
dicateperiods ofextremelytightandskewedliquidityinth
hemarket.We notethatthe shapeofthe
intterbank rate cu
urve and horizontal repo ratee curve are sim
milar until April, where the in
nterbank rates trend upwardss gently. We
beelievethatthisiisasaresultofthevolumeson
nthehorizontaalreposwearinggoffduringthisspartoftheyear.IntheperiodDec2011
Feeb2012,therep
poratewasthe
elowestrateinthemarket.Inthelastmonth
hthereporateoutpacedthetbillsbyawhop
pping751bps
sp
preadleadingto
osevereundersubscriptionsin
nthetbillauctions.
Ba
attlingwithneg
gativeinterestratesWithth
heinterestratesonthetbillfrrontfightingwiithlowsubscrip
ptions,wecould
dseeaslight
up
pturnintheserrates.Figure2aabove,showstthatrealtbillrrateshavebeen
nunderpressureforthe1sthalfoftheyear,dippinginto
thenegativeagaiininMay2012.Withallinflattionsignalspoin
ntingtofurtherrdeclineinthissmeasure,we expectthespreeadbetween
no
ominalandreallratestotrend
dbetween100
0bpsto300bpss.Thehighersp
preadvaluesho
ouldservetoattracthigherflowsintothe
billlsandbonds.

Figure3:Interbank,CBKWindowb
borrowinginFFY2011/2012

KESMillions

3000,000
2550,000
2000,000

RepoVolum
me

TADVolu
ume

RepoRate

TADRatte

35.0%
%

8
80,000

19%
%

30.0%
%

7
70,000

18%
%

KESMillions

3550,000

in
nterbankmonthlytottalvolume
monthlytotalvolumee
C
CBKdiscountwindow
m
monthlywtdavginter
bankrate
m
monthlywtdavgCBKo
overnightdiscountwin
ndowrate

Figuree4:Repo,TAD
DtransactionsiinFY2011/201
12

25.0%
%
20.0%
%

6
60,000
5
50,000

17%
%
16%
%

4
40,000
15%
%

1550,000

15.0%
%

1000,000

10.0%
%

5
50,000

5.0%

1
10,000

13%
%

0.0%

12%
%

Source:CBK
K,D&BDatabank

3
30,000
2
20,000

14%
%

Source:CB
BK,D&BDatabankk

Vib
brantinterbankmarketTheinterbankvolu
umesseeninFiggure3above,aascomparedtoFigures4and5
5showthatthismarkethas
beeen steadily active over the year,
y
with volu
umes far surpaassing those off the horizontaal repo market.. Whilst we kn
now that the
co
omparisonisnotmadeonthesamebasis(interbankloansarredoneonano
overnightbasis,,whilsttherepo
oandhorizontaalreposhave
diffferenttenors),,wedisplayfigu
ures3,4and5toshowthesizzeoftheinterbankmarketand
ditsinfluenceo
onotherratesinthemarket
canbevisible.

FixedIncomeNote|July2012
Figure5:HorizontalRepoTransaction(HRT)inFY2011/2012
HRTVolume

Figure6:HRTVolume,frequencyaccordingtoborrowingtenor
TotalVolume

HRTInterestRate

8,000

120

18,000

30.00%
25.00%

4,000

20.00%

3,000

KESMillions

6,000
5,000

100

16,000
14,000

80

12,000
60

10,000
8,000

15.00%

40

6,000

2,000
10.00%

1,000
0

4,000

No.ofTransactions

7,000

KESMillions

FrequencyofTransactions

20,000

35.00%

20

2,000

5.00%

0
HRTTenor(Days)

Source:CBK,D&BDatabank

Figure7:HRTVolume,frequencyaccordingtocollateraltenor

10,000

9,000

80

80

8,000

70

70

7,000

60

8,000

50

6,000

40
30

4,000

20
2,000

10

60

6,000

50

5,000
40
4,000
30

3,000

20

2,000

10

1,000

DurationatDealTime

YearBills/Bonds

Source:CBK,D&BDatabank

FrequencyofTransactions

90

KESMillions

12,000

KESMillions

HRTVolume

FrequencyofTransations

14,000

No.ofTransactions

HRTVolume

Figure8:HRTVolume,frequencyaccordingtobondduration

Source:CBK,D&BDatabank

Preferences in horizontal repo transactions For longer term borrowing besides the repos (sellbuy backs) done on the NSE
platform,Figure6aboveshowsthatbankspreferborrowingover14days,followedby7daysasopposedtolongertermborrowing
fromthiswindow.Intermsofthepaperspreferred,Figure7indicatesthatthe5year,10yearand15yearrecordthehighestnumber
oftransactions.Atrendappearstobeemergingwherepapersover10yearsareusedmorefrequentlyasthedepthforlongerterm
papers increases. A 2 year time to maturity seems to also be preferable, with a skew towards the lower ended bond durations
accordingtoFigure8.Webelievethatthisisduetothehighercashvalueobtainedforthesepapersasthediscountingeffectlessens
towardsmaturity.

No.ofTransactions

Source:CBK,D&BDatabank

FixedIncomeNote|July2012

PrimaryMarketAnalysis

Anincreasingtrendofbudgetarydeficitshaveledtoaspike

intheissuanceofdomesticdebtoverthepast5years

Figure9:IssuancePatternsofPrimaryBondsinthelast5years
Offered

Accepted

Figure10:IssuanceTrendsseenbyBondMaturities

SubscriptionLevel

180,000

100,000

300%

160,000

90,000
80,000

250%

140,000

25Years

610Years

1120Years

2130Years

70,000

120,000

200%

100,000

KESMillions

KESMillions

Relativelylowerinterestratesensuedthatlongerduration
bondswerepossibleinFY2010/2011,butillogicalfor
FY2011/2012.

150%

80,000
60,000

100%

40,000

50,000
40,000
30,000
20,000

50%

20,000

60,000

10,000

0%

Source:CBK,D&BDatabank

Source:CBK,D&BDatabank

As per Figure 9 above, FY2010/2011 has recorded the highest domestic debt issuance, partly due to the tap issues with fixed
yields/coupons during the year that had no limits on the uptake. We also note that bond demand has outstripped supply for the
previous4fiscalyears.SubscriptionlevelshadbeenhigherinFY2008/2009andFY2009/2010beforefallinginthenextfiscalyear.This
waslargelyduetoloweredsubscriptionsbetweenApril2011andDecember2011.Subscriptionlevelsinthe1sthalfofFY2011/2012
were also affected as a result of banking institutions offering higher interest rates to fund their lending and other treasury related
activitieswhichyieldedhigherreturnsthantheprimarybondmarket.
BonduptakeinFY2011/2012fellby28.7%fromFY2010/2011.WithKenyatryingtoincreasetheirdebtdurationtoalongerterm,the
CBKbeganissuing25and30yearbondsintheFY2009/2010.AccordingtoFigure10above,agapinthe610yearissuesisbecoming
morepronouncedasshorterdatedissuesandmediumtermissues(1120years)havetakenprecedenceinthedebtstructure.53%of
theissuancesinthelast5yearshavebeenbetweenthe25year,18%betweenthe610year,24%betweenthe1120yearand5%
betweenthe2130yearissues.Whilstthebulkofthebondsinalowerdurationkeepfinancingcoststoaminimum;itslowsdownthe
deepeningofthecapitalmarketinraisinglongtermfundsfortreasuryinadditiontoloweringliquidityofthemarketonthelongerend
ofthetimespectrum.

Figure11:IssuancePatternsofPrimaryBondsinthelast5years
Issue/Reopen
date
25Jul11
25Jul11
29Aug11
29Aug11
26Sep11
3Oct11
31Oct11
28Nov11
1Dec11
5Dec11
26Dec11
2Jan12
28Jan12
6Feb12
27Feb12
27Feb12
26Mar12
30Apr12
28May12
25Jun12

Tenure
IssueNo.
Offer
(Years)
FXD2/2011/2(R3)
2
6,500.00
FXD2/2010/10(R2)
10
6,500.00
FXD2/2010/5(R2)
5
5,000.00
SDB1/2011/30(R2)
30
5,000.00
FXD3/2011/2
2
10,000.00
IFB1/2011/12
12
20,000.00
FXD3/2011/2(R1)
2
10,000.00
FXD4/2011/2
2
15,000.00
FXD4/2011/2(Tap)
2
IFB1/2011/12(tap)
12
FXD1/2011/1
1
10,000.00
IFB1/2011/12(tap)
12
FXD1/2012/1
1
10,000.00
IFB1/2011/12(tap)
12
FXD2/2012/1
1
10,000.00
IFB1/2011/12(tap)
12
FXD3/2012/1
1
10,000.00
FXD1/2012/2
2
5,000.00
FXD1/2012/5
5
3,000.00
FXD1/2012/10
10
5,000.00
TOTAL

Source:CBK,D&BDatabank

Received
9,735.59
5,587.14
4,147.94
4,548.27
4,343.25
13,296.89
2,240.47
10,777.94
13,463.75
272.75
18,111.76
1,626.90
31,793.05
5,838.75
34,799.69
21,317.00
15,142.63
27,714.50
6,224.90
4,068.22
235,051.39

Performance
NCB
(%)
149.8%
678.88
86.0%
797.51
83.0%
226.68
91.0%
176.07
43.4%
159.69
66.5%
1,872.73
22.4%
181.06
71.9%
227.20

181.1%
317.9%

2,440.90

348.0%

2,525.60

151.4%
554.3%
207.5%
81.4%

1,411.05
1,418.60
1,270.60
113.00

Acceptedat
FV(KshM)
3,680.05
3,112.73
997.14
2,484.99
639.20
11,625.75
240.76
9,980.05
13,463.75
272.75
11,104.21
1,626.90
14,942.35
5,838.75
10,516.00
21,317.00
15,038.39
6,468.64
4,979.59
445.69
138,774.69

Coupon Redemption PriceperKsh

rate(%)
Yield(%)
100.00atYTM Maturitydate
7.439
12.684
91.964
22Jul13
13.624
13.089
79.990
19Oct20
6.671
13.887
77.378
23Nov15
12.000
16.397
73.441
21Jan41
10.500
13.897
94.240
23Sep13
12.000
16.640
82.082
18Sep23
10.500
16.526
94.240
23Sep13
22.844
22.844
100.000
25Nov13
22.844
22.844
100.000
25Nov13
12.000
16.640
84.384
18Sep23
21.408
21.408
100.000
24Dec12
12.000
16.640
85.428
18Sep23
21.082
21.082
100.000
26Jan13
12.000
16.640
86.751
18Sep23
18.030
18.030
100.000
25Feb13
12.000
16.640
87.555
18Sep23
16.432
16.432
100.000
25Mar13
13.826
13.826
100.000
28Apr14
11.855
11.855
100.000
22May17
12.705
12.705
100.000
13Jun22

FixedIncomeNote|July2012

Treasuryfacesthemusiccausedbyarestrictivemonetarypolicy,asdomesticdebtmarketsareunabletoprovidesufficient
fundstomeetspendingrequirementsaccountedforbythebudgetdeficitforFY2011/2012

Figure12:TearSheetforDomesticBorrowinginthedebtandmoneymarketsfortheFiscalYear2011/2012
TBondsRedemptions
NewBorrowingTBonds
AmountAccepted
Netborrowing/(payout)

Jul11
2,594
13,000
6,793
4,199

Aug11
1,773
10,000
3,482
1,709

Sep11
12,998
10,000
639
12,359

Oct11

10,000
241
241

Nov11

15,000
9,980
9,980

Dec11
7,404
10,000
24,568
17,164

Jan12
9,982
10,000
14,942
4,961

Feb12

10,000
10,516
10,516

Mar12
9,195
10,000
15,038
5,843

Apr12

5,000
6,469
6,469

May12
2,368
3,000
4,980
2,612

Jun12
6,013
5,000
446
5,568

Total
52,327
111,000
98,094
45,767

Jul11
15,086
18,500
14,485
601

Aug11
29,882
24,000
16,908
12,974

Sep11
36,731
32,500
36,567
164

Oct11
21,367
40,000
35,155
13,788

Nov11
12,372
31,000
12,286
87

Dec11
42,404
31,000
20,863
21,540

Jan12
36,396
38,000
38,101
1,706

Feb12
16,943
31,000
43,363
26,421

Mar12
26,057
31,000
29,466
3,409

Apr12
32,092
35,000
33,724
1,632

May12
25,720
18,000
17,265
8,455

Jun12
15,068
18,000
9,101
5,967

Total

TBillsRedemptions
ActualTBillsOffered
AmountAccepted
Newborrowing/(Netrepayment)
TBillsandTBonds
TotalRedemptions
TotalBorrowingTargeted
TotalAccepted
TotalNewBorrowing
NewBorrowingCummulative

Jul11
17,679
31,500
21,278
3,598
3,598

Aug11
31,654
34,000
20,390
11,265
7,666

Sep11
49,729
42,500
37,206
12,523
20,189

Oct11
21,367
50,000
35,396
14,029
6,160

Nov11
12,372
46,000
22,266
9,893
3,733

Dec11
49,808
41,000
45,431
4,377
644

Jan12
46,378
48,000
53,044
6,666
6,022

Feb12
16,943
41,000
53,880
36,937
42,959

Mar12
35,252
41,000
44,504
9,252
52,212

Apr12
32,092
40,000
40,192
8,101
60,312

May12
28,088
21,000
22,245
5,843
54,469

Jun12
21,081
23,000
9,546
11,535
42,934

2,833
Total

42,934

Source:CBK,D&BDatabank

How did the bonds perform compared to the bills? A squeeze in the monetary policy and heightened interest rates led to flight from money market instruments into debt
structuresforthebetterpartoftheFY2011/2012,pavingaholeinthemoneymarketborrowingtargetsasperthebudgetforthepreviousyear.Thetreasurybillssubscriptions
werefurtherexacerbatedbyintermittentliquidityinbanks,andapreferenceforinvestingintheovernightmarketattheCentralBankandtheinterbankmarketyieldedhigher
returnsreasonenoughforbankinginstitutionstoavoidthebills.
Effects of putting a lid on inflation To soak up excess liquidity from the market in order to keep the flyway inflation under wraps in addition to meeting its borrowing
requirements,theCBKsteppedupitsborrowingtargetsfromSeptember2011toApril2012ontheTbillsfrontwhilstattemptingtominimizeitsinterestpaymentsduringahigh
interestrateregimebyloweringitsdurationonthelongerdatedbondsarena.WithliquiditybeingfairlytightinMayandJune2012(preferenceshownforhighyieldingreposand
newerlongertermauctiondeposits,introducedJune2012)andtbillyieldslowerthaninpreviousmonths,theCentralBankloweredborrowingtargetsforthosemonths.
Did Treasury meet its targets for borrowing in the domestic debt market? Treasury had earmarked KES 83.65 billion in new borrowing in the domestic debt market for
FY2011/2012 as well as KES 35.85 billion for infrastructure related debt, the two totaling KES 119.5 billion. Figure 12 above shows that new borrowing for FY2011/2012
culminatedtoKES42.9billionforthedomesticdebtmarketandKES40.68billionraisedfromtheinfrastructurebondssumminguptoKES83.615billion.Thisresultedina
differentialofKES35.88billion.Duringtheyear,TreasurydrewdownanoverdraftofKES25.4billionfromCBKlargelyduringtheearliermonthsoftheyearforworkingcapital
requirementsandredemptionpaymentsandweareunclearastowhetherthishasbeeninpartorfull.IfunpaidthiswouldbringdownthedeficittoKES10.48billion.
SyndicatedloantotherescueApictureofagapingdifferentialinbudgetedforecastsbecameevidentbytheendofthefirsthalfofthefiscalyearandstartedtheballrollingto
obtaina$600 millionsyndicatedloan(approximately KES51billion)at LIBORplus475basispointsfromthreeinternationalbankssubstitutingforthedeficit inthe domestic
borrowing.Thefirsttrancheoftheloanarrivedinthe1stweekofJune2012of$240million,withtheremainder(approxKES31billion)arrivinginthe4thweekofJune.Duetolate
arrivalofthefundsinthelastfiscalyear,webelievethatthiscouldspilloverintothecurrentfiscalyear.

FixedIncomeNote|July2012

Redemptionspaintanemergingpictureofhigherliquidity inthe3rd and4th quartersofFY2012/2013subjectto

consistentrolloversfromthe91Dand182D,albeitcoloredbyothermoneymarketinstrumentsavailableto
financialinstitutionsonly

24000
22000
20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
0

Source:D&BDatabank

Figure14:TbondredemptionsinFY2012/2013

364DRedemptions
182DRedemptions
91DRedemptions

KESBillions

KESBillions

Figure13:TbillredemptionsinFY2012/2013

24000
22000
20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
0

Source:D&BDatabank

WheredodebtredemptionsstandatinFY2012/2013?AsdisplayedintheFigure13above,redemptionsforthe91DTbillareonly
forthefirstthreemonth,182Dbillsforthefirstsixmonthsand364Dbillsfortheyear,astheystandatthismomentintime.Note
thatthepriortwoTbills,mayberolledoverduringtheyearseverally.TotalredemptionsforTbillsfortheyear2012/2013standat
KES 120.76 Billion as at the beginning of the year (July 2013). TBond redemptions as shown in the Figure 14 above, total KES
155.67BillionforFY2012/2013.
Connect the dots... The trend above display different liquidity strains/surpluses in each month. Our preliminary analysis shows
tighterliquidityduringthemonthsofOctoberandNovemberof2012.Thestrainarisesasaresultoflowerexpectedsubscriptionsin
tbillsinthemonthsofJuly,AugustandSeptemberintheshortterm,whichwillaffectredemptionsinOctoberandNovemberwhich
arerelativelylowerthantheothermonthsduring1sthalfFY2012/2013.Theaboveredemptionfigureswillnotchangefromanynew
bond maturities (typically longer than a year). However, both the bills and bonds are subject to rediscounting at the CBK and
thereforemayberetiredatanearlierdatethanshowninFigures13and14.
Key inferences from redemptions Bond redemptions in FY2012/2013 are 197% higher than those in FY2011/2012 at KES 52.3
billion. According to the FY2012/2013 budget, KES 170.5 billion will be raised through rollovers of redemptions. At present with
both bond and bill redemptions in FY2012/2013 equate to KES 276.4 billion, we think that is will be fairly easy to achieve the
rolloverfiguresaforementionedinthebudget.However,wedrawthefollowingconclusionfromthedifferentialofKES105.9billion
thatwillnotberolledover:liquidityinthefinancialsystemwillincreaseleadingustothebeliefthatwhilstliquiditywastightenedto
astrangleholdinthepreviousyear,maintainingarestrictivepolicyinthecurrentyearwillbeallthemoredifficult.Ourworryisthat
thiscouldpotentiallyleadtoapullbackontheinflationtargetingofbelow9%.However,theCBKareonehandupthisyearwithnew
ammunition in the form of Term Deposit Auctions (TADs), a money market instrument which CBK can use as a sponge at interest
ratesofvaryingdegreestosoakupliquiditywiththeprovisothatitwillyieldhigherreturnsthantheinterbankmarketatthetime.
However,itcouldaffectsubscriptionlevelsfortbillsespeciallyonthelowerend(91Dand182D)astheinstrumentisseentoprovide
higheryieldswiththepossibilityofbeingrolledoverifliquidityisdeemedtobehigh.Wedontexpectbondsubscriptionsoryieldsto
behighlyaffectedbytheTADs.WiththeCBKbeingextremelyvigilantonthecurrencyfrontafterlastyearsdebacleinadditionto
bufferedforeignreserves,wedontexpectreturnsfromcurrencytradingtoplayanyinterferenceintheprimarybondyieldsarena.
Further endorsement to our belief on interest ratesWith regards to new debt borrowing, Treasury intends to raise KES 106.7
billionforFY2012/2013a360%increaseonthepreviousyearsnewdomesticdebtmobilization.SpilloverfromFY2011/2012of
approximatelyKES2030billion(fromsyndicatedloan),theamounttoberaiseddomesticallyfallstoKES7686billion.Takinginto
considerationaccesstoanoverdrafttocoverworkingcapitaldeficienciesaswellastheadditionalliquidityfromredemptionsand
externalfinancing,wecometotheconclusionthatthetargetedamountcouldberaisedwithoutmuchdifficulty.Wethinkthatthe
excess liquidity expected within financial institutions will likely be used to bulk up their trading books which have been sorely
affected last year. All these factors advocate for falling interest rates, as options to park excess cash are likely to favor bonds,
especiallylongertermbondswhicharecurrentlyinhighdemandbyinstitutions(atypicalcaseofhighdemandleadingtolowered
interestrates).

FixedIncomeNote|July2012

SecondaryMarketTrading
The yield curves (YC) began the year with a gently upward sloping
trend(orangeline),movingtoaflatterlineontheshortandmedium
termbutstillupwardslopingonthelongerendbySeptember2011
(purpleline)asaresultofasignalina75bpsratehikeintheCBRto
7%inSeptember2011.Thereafter,thereopeningofa2yearbondin
theprimarymarket,raisedyieldsformost2yearissuestolevelsof
bondissuesofupto20years.Thenextquartersawaninversionin
theyieldcurveastheCBRwasincreasedinOctober2011by400bps
to 11% which was quite unexpected but necessary for taming
inflationandagaininNovember2011by550bpsto16.5%.TheYC
forOctober2011(blackline)isclearlyanoutlier.Thiscurvetookthe
400bpshikeontheCBRliterallyandtookuptheratesbythesimilar
levels. The additional hike in November coupled with CBKs
intentionsatthetimeofissuingonlyshortdatedpaperschangethe
YCshapesharplyagain.Another2yearissueinNovemberspikedthe
yieldsofthe2yeartonewheights,loweringdemandandthusyields
in the medium term, with longer end yields recovering to post
October2011levels.TheYCremainedinaUShapeduringthenext
quarter,albeitwithyieldsabatingontheshorterend.Bytheendof
June2012,theYCdroppeddown400bpsontheshortendandhad
similaryieldlevelsasJuly2011.

Figure15:NSEimpliedyieldsforTbondswithintheyear

Source:NSE,D&BDatabank

Bondsontheshortendofthespectrumhavebeentrading
atahigherspreadthanthemediumorlongerdatedbonds

Thewildlyfluctuatingspreadsbetweenthebonds
indicatingtwistsintheyieldcurveovertheyear

Figure16:NSEimpliedyieldsforTbondswithintheyear
25.00
23.00

2YearTBond

5YearTBond

15YearTBond

20YearTBond

Figure17:SpreadsbetweentheTBondsyields
500
400
300
200
100
0
100
200
300
400
500
600
700
800
900

10YearTBond

21.00
19.00
17.00
15.00
13.00
11.00
9.00
7.00

Source:NSE,D&BDatabank

10Year 15YearSpread
15Year 25YearSpread
5Year 10YearSpread
2Year 5YearSpread

Source:NSE,D&BDatabank

AsteepincreaseinyieldsfromSeptembertoDecember2011,asperFigure16,occurredasaresultof:i)theincreaseintheCBRrateto
18%,ii)shortfallindomesticborrowingandiii)hightreasuryrequirementsatthatpointintime.Thenonissuanceofmediumorlonger
dated bonds since September 2011 until May 2012 sent the 2 year bond yield soaring high; whilst yields for other bonds fell in
December2011liquiditywasdivertedtothe2year.Sincethenthe2yearyieldhasbeenfallinginsteps,trendingtowardsotherbond
yieldswhichhaveremainedmoreorlessflatuntilFebruary2012.Withinflationtrendingdownwardsrapidlyandloweredsubscriptions
anduptakeforlocaldebtasaresultoftheinflowofthe$600millionoffshoreloan,allotherbondyieldshavebeenfallingsoftly.Bythe
endoftheyear,bondyieldshadcorrectedwithagentlyupwardslopingyieldcurve.
AsseenfromFigure17above,widerspreadsontheshortendoftheyieldcurve(2and5year)havehadaclearadvantageoverlonger
issuesduringtheyear,especiallythe2yearasitsspreadagainstthe5yearbondreachedhighsof858bps.Onthelongerendedbonds,
the15yearhadayieldadvantageoverthe25year.FromDecember2011toMarch2012,theCBKonlyissued/reopened1yearbonds
andthespreadsbegantonarrow.Supplyonthelongerendedbondsandmediumtermbondswereverythinduringtheyearwhichput
downwardpressureontheyieldsasfundmanagerslostoutduetohigherdemand.InApril,itissuedthe2yearbondwhichsawthe
spreadonthe2yearagainstotherbondswiden.Theissuanceofa5yearbond,withadropinyieldssawtheyieldcurverisingupwards
onceagainwiththespreadsbetweenthelongerdatedandshorterdatedbondsonthepositivearena.

FixedIncomeNote|July2012
Figure18:Top20bondstradedinFY2011/2012
The Figure 18 on the right portrays trading including
Sell buy Backs (SBBs). Trading on the IFB 5 is the last
year has been most rampant partly due to the high
yield and coupon obtained on the bond, its longer
duration compared to all the shorter duration bonds
issued during the year. High trades for this bond were
recorded in the last quarter of the year as seen in
Figurebelow.

Source:CBK,D&BDatabank

Besides the FXD 4/2011/2, FXD 2/2011/2, FXD

1/2011/5,FXD2/2012/1andFXD1/2012/1,therestof
thebondsareallover10years,indicatingthatdemand
forlongerdurationbondsishighandoutstripssupplyin
theprimaries.

Figure19:SecondaryBondTradingbyVolume

FixedIncomeNote|July2012
Figure19:SecondaryBondTradingbyVolumeinMillions(cont)

Source:CBK,NSE,D&BDatabank

Bondvolumesinthe1stquarterofFY2011/2012,comprisedof29.8%ofthetotalvolumefortheyear,followedbythe4thquarterwith
26.25%,22.96%inthe3rdquarterand20.9%inthe2ndquarter.Again,webelievethatinthesecondandthirdquarters,tradingwas
subduedduetoflowsshiftingintohigheryieldingbankingdepositsandshortageofsupplyinthesecondarymarketasreturnsonmost
bondstradedwentintothenegativeterritory.

FixedIncomeNote|July2012

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