Morning guys,

i was reading the other day about the above topic and couldn't help ponder if infact the effective duration (sensitivity of a bonds price to changes in yeild)convexity and the term structure of interest rates are actually considered when pricing/valuing bonds in kenya? if so, do the annualized yields correlate to the one in europe considering the theories of the term structure?

so ur askin if kes govt bond yields correlate to those of european bond yields? correlation implies a departure of 2 or more variables from independence...so are u askin whether the kes yield curve and the european bond yield curve are correlated ama? if thats ur question u wud have to do a correlation analysis..lucky for u i have a tool which i use for this..

@Scooby indeed true bearing in mind the term structure theories of liquidity,preference,expectations and market segmentation, but the gist of my question is that we know that factors such as the type of issuer,taxability of interest,inclusion of options financability of the issue etc etc, all affect the term structure.... is it in order to say that lower duration means higher yield and vice versa and if so higher volatility implies lower yield to maturity?

@kizee ebu send me that link. i am asking if the annualized yields factoring in all elements that affect convexity (callability,yield curve etc affects or accounts for the inaccuracies of the linear duration line?

Hi Emyln,

A lower duration means that an investor has lesser concerns about interest rate risk (or in your words, lower interest rate volatility) and would therefore not mind getting a lower interest rate for their investment. The opposite is true for long duration.

The issue of yields is not influenced by the government or CBK. Thats a function of the secondary market. The high demand this year for treasury bonds has resulted in the market prices of bonds hitting the roof - thereby resulting in the significantly lower current yields (for you its yield to maturity).

As I mentioned, the government is taking advantage of that to price the current infrastructure bond at 6%. And in order to ensure that its fully taken up, they offered such incentives as tax free interest (as opposed to taxable interest).

As for type of issuer, government bonds are deemed to be risk free hence can offer a lower interest rate. If Housing Finance had also decided to issue a similar infrastructure bond, it would have been forced to charge a higher interest rate as they are deemed to be more risky that the government.

The market in Kenya is yet to fully adopt the impact of optionalities when pricing the bonds. The KenGen and ARM bonds should have charged a higher interest rate than what they were offered at. The use of options does affect the duration of a bond/portfolio.

Ya'll need to keep this post going.

@scooby. What’s your take on the rise of some of the yield curves? 91D, 182D and 15 yr yld have risen marginally. Given the liquidity there's no profit incentive in lowering the 91D to interbank right?