CBK moves to strengthen bond market

By James Anyanzwa

The Central Bank of Kenya (CBK) has recommended the creation of a technical committee to look into ways of strengthening the performance of the bond market.

The banking regulator says the slow pace of reforms has hindered faster growth of the market.

"We are proposing creation of a Technical Committee whose main terms of reference will be to address specific assignments," Prof Njuguna Ndung’u, the bank’s Governor told a Market Leaders Forum (MLF) last week, adding that members of the committee will depend on the specific assignments.

The bank says trading of bonds manually in the secondary market has delayed the rollout of the Over-The-Counter (OTC) trading platform thereby making the bond market illiquid.

The bank says high inflation has remained a concern to long-term fixed income securities since it is perceived to undermine expected returns.

"This perhaps was the cause of high yields witnessed on long dated papers but we do know that computation of inflation has been problematic," says Ndung’u.

"But above all, the economic recovery was hampered by the drought that virtually reversed the economic vibrancy."

Investor base

The Central Bank, however, contends that the reduction of minimum entry into Treasury Bills from Sh1 million to Sh100, 000 early this year was critical in widening investor base as well as promoting savings among Kenyans. The bank has successfully implemented Treasury Bonds benchmarks and reopening as it strives to deal with bond market fragmentation problem currently facing the market.

The adoption of auction-based method in bonds issuance has also promoted price discovery and led to the establishment of a reliable yield curve, which are key ingredients to secondary market.

In February this year, the Government issued the first sector specific bond to fund key infrastructure projects.

A number of public, private as well as supranational agencies have since taken cue to tap the market for long-term funding through bond issuance. "This is the road to a vibrant bond market when corporate join the market," says Ndung’u adding reduced moratorium on trading of newly issued Treasury bonds from seven to four days has boosted secondary market trading.

The average maturity profile of domestic debt in Government securities rose from eight months (ratio of 76:24 for Treasury bills to Bonds) in June 2001 to three years and nine months (25:75) last month.