This archive report was first published on 15 September 2019.
Sunday, September 15, 2019, marked a significant decline in bond turnover at the Nairobi Securities Exchange (NSE), with investors hesitant to invest due to uncertainty surrounding the rate cap law.
According to data from the NSE, the monthly bond turnover in August dropped to Sh41.2 billion, a 51.3 percent decline from July's Sh84.7 billion.
Despite the market being fairly liquid and equities markets continuing to underperform, the sharp drop in bond turnover was attributed to investor uncertainty over the direction of the rate cap law and the pressure on the shilling.
Kenya's Finance Bill 2019, which proposes the removal of the interest rate cap law, has left investors undecided on where to put their money.
"The market is not settled on the way this will go - whether it will be fully repealed, amended or will just be retained," said Kenneth Minjire, head of fixed income at Genghis Capital.
Minjire further explained that if the rate cap law is repealed, it will have an immediate impact on the yields traded on the secondary market, as banks have been lending the Central Bank of Kenya (CBK) more than the private sector.
MP Jude Njomo, who moved the rate cap law in 2016, has introduced amendments to address the grounds that the High Court ruled were unconstitutional when striking out the law earlier this year.
These amendments, if successful, will likely see the rate cap retained.
Minjire expects that if banks are handed back a free hand in pricing loans, they will cut their appetite for government paper and open up to lending to the private sector.
Banks are the biggest holders of government domestic debt, accounting for 54.35 percent, followed by pension funds at 28.19 percent.
The shilling has also been under pressure from foreign currencies since the onset of the new fiscal year in July, forcing the CBK to be more aggressive in mopping up excess liquidity in the market.
"When CBK mops up money, that is indirect competition with secondary market trading because it takes money at between 6.5 percent and 7.5 percent," explained Minjire.
