Hi Scubidu,

I know you will be mad when you read this story on Friday's Business Daily - http://www.businessdaily...-/14f8c9qz/-/index.html

That's why I was suggesting that we really understand the real estate sector and the company business before we conclude on whether its a good/bad move for Housing Finance.

Hope that make's sense to you.

Regards

Hi Scubidu,

For banks, the ratio if interest income to interest expense is similar to gross profit for manufacturing firms. That's why I was asking you to look at the interest on the bond as a direct cost to the bank.

I had a glance at HF's website yesterday. They have this initiative to fund developers who are constructing either single dwelling units or multiple dwelling units. After the property is finished, HF would seek to entice the buyers of the units to finance it through them.

This approach is a great idea. My concern of late is that there has been lots of focus by the industry on the high income segment which is starting to cool off going by the movement in the Hass Index. A couple of my real estate contacts are mentioning to me that there are now noticing instances where there are unsold units in a project...maybe we could have someone else confirm that is the case from their end.

You are right in assuming that they could place the funds in treasuries. Assuming they would want to match the duration of the bond with an asset, the maximum yield they would get on a "7 year" bond would be around 5% which could lead to a a lower ratio of interest income and interest expense.

Btw, they mentioned that they don't intend to retire their existing debt obligations with Stanchart and Equity Bank.

Regards

sorry to throw the discussion off topic but do you think having a bond index in Kenya is viable? considering the recent increase in bond trading due to automation and the plans to further demutualise it from the NSE?
Any takes on the HFCK floating rate bond? I think It will do well though it will be abit tricky seeing as the coupon rate is floating

dkuyoh,

The HF floating rate bond could start to be a viable investment if the treasury bill rates start to go up...given by the results of this week's ten year bond.

I'm yet to hear any comments from the industry desiring a bond index. They seem to be comfortable with the NSE yield curve given the profile of most investors in the market i.e. prefer maximising their interest income (hence holding fixed income investments to maturity) rather than trading the investments.

Also, how are D & B going to price bonds with optionality features i.e. the KenGen and ARM bonds?

dkuyoh,

I assume you are referring to the fact that the maximum interest rate on the floating rate bond is 9.5% . Won't that be deemed to be a cap/ceiling on the interest rate? It wont be a good thing because its value would decline if the T-Bill rates goes past 6.5%.

The yields for existing bonds and interest rates for new tresury issues would definitely go up...the current yields are quite ridiculous!

FYI, the HF was offered at par. And given the fact that the market is illiquid to date, it will be hard for one to determine its interest rate volatility unless one uses as a proxy, the volatility of the seven year treasuries.

@ dkuyoh,

A bond index does [did?] exist courtesy African Alliance.

@Scubidu

http://www.standardandpo...p;assetID=1221186708589

You can get a wealth of information/ideas from reading up on the "Index Methodology" per index.

Here is a sample on U.S Treasuries [S&P/BGCantor]
http://www.standardandpo...;blobheadervalue3=UTF-8 [PDF]

dkuyoh,

The 9.5% limit includes a 300 bps for credit risk. Hence, treasury bill rate needed to arrive at the limit is 6.5%.

Hope that clarifies what I was talking about... and I hope I didn't misread the prospectus.

Regards

Trading bonds in Kenya I believe is tough, market data is scanty, the yield curve doesn't have all points along the curve covered, the tendency of bondholders to be satisfied with the coupons and not capital gains due to bond prices, the list is endless and so are the opportunities for a smart player to make big money.

active management strategies are less practised in kenya(valuation analysis , credit analysis or interest rate anticipation.this is due to the fact that tracking error is large due to the volatility in interest rates.also the general economic climate and demand fo bonds is low due to high inflation rates and slow global economic pace experienced now.

kenyans practice the more common buy and hold strategy that is easy to practice and minimizes tracking error