Kenya Bond Rally Fueled by Investors Who Have Run Out of Options


By Adelaide Changole

Index of government debt gains everyday for more than 2 months
Banks’ holdings of government debt has risen to a record

Kenya’s best bond rally in at least five years has less to do with faith in the sovereign than finding a place to hide.

An index of the government’s local-currency debt has advanced for 67 straight days, the longest run since Bloomberg began tracking the data in 2012, as an increase in non-performing loans and high charges on investments by insurance companies outside of government debt boost demand for the bonds. Investors are buying three-month Treasury bills even though the real yield has been in the red since inflation accelerated above 9 percent in February.

With non-performing loans on the rise, a law capping repayment rates at 14 percent means financial institutions can’t price in credit risks adequately, diminishing the appeal of lending to the private sector, according to Jared Osoro, the Nairobi-based director of research at the Kenya Bankers Association. And the start of capital charges in 2016 for insurance firms’ investments, with rates ranging from 10 percent for secured loans to 100 percent for unsecured debt, prompted the companies to look at buying more Kenyan bonds.

The charges “have made all insurers now look at their books of government debt because now that is the only type that’s admissible,” said Kelvin Mutahi, a senior investment analyst at Nairobi-based Britam Asset Managers.
Borrowing Soars

The demand has helped boost Kenya’s local borrowings in the 12 months through June to 440.1 billion shillings ($4.2 billion), according to Nairobi-based Cytonn Investments’s calculations, double its initial target for the fiscal year. Banks now hold a record 1.19 trillion shillings worth of government bonds, while loan growth to the private sector has eased to 2.1 percent in May, the slowest pace in at least 15 years, according to data from the Central Bank of Kenya.

The rise in government debt comes as the world’s biggest exporter of black tea prepares for a presidential vote next month. If history is a guide, it may usher in a period of uncertainty and dampen economic growth, which has already eased to the slowest pace since 2014 amid the driest weather in three decades.

The last two election results were questioned by the opposition, with the dispute over the outcome of the December 2007 vote triggering months of violence that killed at least 1,100 people and slowed growth to 1.7 percent in 2008 from 7.1 percent the previous year.

The yield on 91-day Treasury bills has declined 35 basis points this year to 8.21 percent, about a percentage point below the nation’s inflation rate. The Bloomberg Kenya Local Sovereign Index gained 11 percent this year, sending the average yield on domestic bonds tumbling 76 basis points to 12.5 percent as of July 17.

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