Bond values at NSE fall as interest rates rise

This story has significance for readers across Kenya and beyond.

Bond prices in the secondary market at the Nairobi bourse have come down compared to a year ago as interest rates rise in the wake of the war in Iran, cutting the profits for those opting to sell their bonds before maturity.

In their half-year financial results, listed banks say they recorded a paper loss of Sh7.2 billion on the value of their government bonds due to the secondary market price movement.

A sample of listed bonds shows that majority are trading at market prices that are lower compared to last year, backing the revaluation by banks.

On the shorter end of the market, a three-year bond issued in January 2024 is now trading at Sh104.95 per unit of Sh100, down from Sh111.18 in June 2025.

A five-year bond issued in July 2023 has seen its price fall from Sh115.56 to Sh111.47 in the period. Similarly, long term bonds are also trading lower, with a 20-year paper issued in April 2019 trading at Sh95.62 per unit, from Sh99.15 last year.

A unit of a bond is priced at Sh100 when the paper is first issued by the Central Bank of Kenya (CBK) in what is known as a primary sale.

But they usually sell above or below this price in the secondary market at the Nairobi Securities Exchange (NSE) depending on the prevailing demand, which is determined largely by whether new bonds coming into the market are paying higher or lower rates in comparison.

Therefore, bond prices and yields in the secondary market have an inverse relationship, where a rise in one accompanies a fall in the other. These market prices are used when reporting the fair value of securities, including those holdings in the hands of commercial banks, pension funds and insurance companies.

Bankers Sh7.2 billion paper losses are in contrast to the gain of Sh46 billion the lenders reported on their balance sheets in the corresponding period in 2025, when falling interest rates resulted in higher bond prices.

The change in valuation has come after yields in the NSE bonds market rose from the end of February after the start of the war in Iran spooked global markets, pushing rates higher. Inflation also jumped due to higher energy prices, forcing investors to demand higher returns from bond issuers to cover against erosion of real returns.

The price falls however do not affect securities issued at a high premium of between 15 and 18 percent— such as the infrastructure bonds of 2023 and 2024—still attracting high prices because new bonds cannot match their returns. The 8.5-year infrastructure bond sold in February 2024 at 18.46 percent is still trading at Sh122.25 per unit, compared to a price of Sh122.39 in June 2025.

When rates on new bonds coming into the market in primary sales are falling, holders of existing papers that pay higher interest rates demand higher prices in order to sell their units in the secondary market, given that they would not get similar returns when reinvesting the funds in new bonds.

Alternatively, if interest rates on newly issued bonds are rising, holders of existing securities that pay lower returns are willing to sell at a discount in order to reinvest the proceeds in the higher paying paper. For banks, financial reporting standards demand that they report the value of their bond holdings held for trading purposes based on current market prices, rather than the historical cost of acquisition.

Therefore, when publishing their financials, they can either indicate an unrealised gain or a loss on their holdings, depending on the movement of bond prices in the Nairobi Securities Exchange (NSE).Banks also hold other securities beyond Kenya government bonds and Treasury bills, whose current market valuations are also factored in when calculating the fair value losses or gains.

These include holdings of sovereign bonds such as the Kenya Eurobonds. However, the fair value gains or losses can only be realised in the event of a sale of the securities, meaning that they do not affect the lender’s net profit so long as they remain in hand.

The risk to the large local banks from the price fluctuations of these securities (known as sovereign exposure risk) is seen as minimal due to their high liquidity and diversified sources of deposits, especially from the large pool of retail depositors, which makes it unlikely that they would need to liquidate the bonds under distress.

Reporting originally appeared via Business Daily. Read the full source for additional context.