Foreign investors held a mere Sh834 million or a 0.2 percent share of outstanding infrastructure bonds issued in the 2023/24 financial year to the end of March despite expectations for higher holdings on improved macroeconomic sentiment.
Data from the Treasury shows domestic financing from non-residents through infrastructure bonds in the quarter ended March was against the perceived high participation by foreigners in the February tax-free bond.
During the paper’s auction, the Central Bank of Kenya (CBK) highlighted the healthy appetites for the issue from foreigners which coincided at the time with Kenya’s issuance of a new Eurobond to partly offset the maturity from its debut 2014 sovereign bond.
“We are expecting external inflows because of the infrastructure bond and we have also seen interest even in just the regular auction of Treasury bills and bonds,” CBK Governor Kamau Thugge observed on February 7.
Foreign interest in the infrastructure bond, which closed with a 18.4607 percent coupon, could however be masked by subsequent sell-offs in the secondary market as the paper dominated trading to sell at a premium.
Bond turnover in the secondary market rose nearly two-fold in the first quarter to March, hitting Sh458.2 billion from Sh162.5 billion in the same quarter last year, according to data from the Capital Markets Authority.
The February tax-free bond continues to sell at a premium to date, fetching as much as Sh105.73 during Monday’s trading session.
Delayed interest rate cuts in advanced economies are seen to push some foreigners into disposing of their holdings of the infrastructure bond by opting back into safe haven asset classes, explaining the minimal holdings of tax-free bonds by foreigners in the period.
“Obviously the cuts are yet to happen and as a result, you will kind of see mixed signals. For instance, foreigners bought considerably into the infrastructure bond but then sentiment on interest rates staying higher for longer did lead some of the buyers to sell it as they went back into a risk-off environment,” Citi Bank Economist for Africa David Cowan told this publication in an interview last week.
Commercial banks and non-banking entities including pension funds, insurance firms and retail investors remain the leading holders of infrastructure bonds with lenders, for instance, having a balance of Sh191 billion from the papers in the quarter ended March or 59.74 percent of the total share.
Non-baking entities, meanwhile held Sh127.86 billion in infrastructure bonds as of the end of March 2024.
February’s infrastructure bond mobilised Sh240.9 billion for the government from Sh288.6 billion in investor bids representing a four-fold subscription rate.
Infrastructure bonds are usually lucrative to investors based on their tax-free status.