Fixed Income Trading
At Suntra Investment Bank, we assist clients to build balanced investment portfolios with the objective of optimizing returns with as low exposure to risk as possible. In diversifying investments, investors may want to invest some funds in shares and the rest in other money and capital market instruments. In the funds management department of Suntra, we advise clients on the other options open to them.
FIXED INCOME DEPARTMENT
Other than trading in shares, Suntra has a dedicated desk for bonds trading, where we buy and sell both corporate and treasury bonds on behalf of our clients – retail, institutional, both local and foreign.
Through extensive market research, and in conjunction with our research department, we are in a position to give up to date advice as pertaining to the current market trends in the market. For example, the Suntra Yield Curve is prepared on a weekly basis and distributed to our clients on a weekly basis or on request.
Suntra organises training sessions across the country in order to create awareness on investing in debt securities because we feel that majority of the citizens concentrate on buying and selling of shares and therefore missing out on a opportunity that could help balance their investment portfolio.
We also assist our corporate clients value their bond portfolios whenever need arises using our in-house bond valuation model.
The fixed income team consist of staff with wide knowledge and vast experience in the bond market. The company has been instrumental in assisting various corporate bodies, from different economic sectors, raise money in the capital market through successful bond issues amounting to billions of shillings. This has provided opportunity for Suntra to have a deeper understanding of the Kenyan debt capital market, it’s challenges and suitable arrangements that would meet the clients’ intended objectives.
IMPACT OF RISING INTEREST RATES TO THE COST OF MONEY AND FIXED INCOME TRADING
Rising or declining interest rates cause a lot of instability in any money market environment. It expresses the expectations of the market players towards the weekly auctions by the government in the domestic money and capital market. Whereas there is no scientifically fixed rate at which point short term interest rates should be stabilized, most markets world over have an internal optimal stable rate which is acceptable by all the market players.
Effects on the cost of money
Interest rate measures the cost of funds lent to any issuer be it a corporate entity or the government. The benchmarks upon which other money market products are priced are the treasury bills which are, in the Kenyan case, issued on a weekly basis. The Central Bank of Kenya introduced the Kenya Bankers Reference Rate (KBRR) as a reference rate at which commercial banks should lend money to their customers. KBRR is calculated from the movement of the latest Treasury Bill rates meaning that banks keep on adjusting the lending rates depending on the variances of government borrowing rates.
When interest rates are very low, the owners of capital have to also lower their lending rates. As such with the cost of money being cheap, more activities are likely to emanate which include funds borrowed to finance more productive activities in the economy. However, to reap the maximum benefits of a low interest rate regime, inflation has also to be put on check in tandem with the exchange rates to ensure that savers do not get negative yields.
On the other hand when the interest rates are high, owners of capital look for the easiest, cheapest and risk free way to investment those funds. This leads to diversion of resources from being lent to the productive sectors to the high yielding short-term products like the Treasury Bills.
When the cost of borrowing goes up, there is a risk in that many borrowers, who had taken their loans when the interest rates were low, may not be able to service their loans and this may eventually lead to cases of bad debts.
Effects on government borrowing
Stable interest rates make government borrowing manageable and this drives to higher demand for government bills and bonds. This therefore means with proper management of the levels of interest rates in any market, the supply and demand can be also managed. The rising interest rates tend to send signals to investors that more and better return is yet to come.
Effects on bonds market
Bonds’ trading is entirely dependent on stable and predictable interest rates, to the extent that any disturbance in the stability can heavily discourage trading in the secondary market. The basic principal behind bonds’ trading is the yield to maturity (YTM) concept which states that fixed income securities should be traded when priced to maturity. The remaining life of the bond has to be priced to the resultant yield in the market. By doing this, all the fixed income securities have to be valued to the current market conditions. This helps the bonds holder determine the worth of that investment at the existing prices in the market. The prices of bonds are inversely related to the yield to maturity. In a rising interest rates regime, therefore, the value of the fixed income securities tends to decline. This makes the holders to book losses on those investment which can easily be realized when those bonds are literally sold to a third party. In the current Kenyan situation where the Treasury bill rates have more than doubled since the beginning of the year, most bondholders are booking losses. However since no trader of bonds would wish to make huge losses when selling, trading at the secondary market has drastically come down.