What yield curve is saying on Kenyan investment front

Throughout this time, investors focused on the surge in the yields of short-term government debt and maximised on the opportunities.

The yield curve spotted a slightly humped shape. In other words, yields for medium-term notes were higher than those for short-term and long-term bonds, a scenario often viewed as a sign of worries over economic growth (mostly slowing) and uncertainty about monetary policy.

Fast forward, in the past several weeks, interest rates on treasuries have been on a climb down (more evident at the short end of the yield curve) partly reflecting easing of the monetary policy stance and improved inflationary conditions.

Short-term interest rates have decreased in line with the reduction in the Central Bank Rate (CBR). The 91-day Treasury has dropped to 10.45 percent in the closing week of December 2024, up from 15.82 percent at the end of April 2024, while the 182-day Treasury has declined from 16.46 percent to 10.54 percent over a similar period.

With a normal yield curve slowly developing - where short-term treasuries yield lower than long-term ones -, will investors take the yield advantage that longer-dated securities usually hold over shorter-dated ones? Yes. But how?

Investors can lengthen duration or buy longer-dated assets, as they prepare for Central Banks easing and possible recession. This is because as rates fall, bonds with higher yields become more attractive, causing their prices to rise.

Maturities of five to 10 years, for instance, are sensitive enough to capture price gains when rates drop, but they also carry less interest rate risk than longer-term bonds.

This can be actualised through shifting your funds from money market funds to bond funds - if your investment house has an umbrella set up.

However, investors still have a choice to stay “neutral” - stay focussed on shorter-dated treasuries. If you expect inflation to reaccelerate (perhaps guided by the cautious stance taken by the Central Bank to stay its key rate at double digits when inflation is down to low single digits), this approach should best serve you.

If you believe the secondary effects of Trump’s presidency and his threats to impose tariffs on a range of imported products would flare up inflation, this approach should best serve you.

If you stay away from the very end of the curve owing to the fact it tends to be dependent on Treasury supply and longer term inflation expectations, staying “neutral” will work for you.

You see, fears of higher inflation often prompt a sell off on the long end, pushing yields higher as investors demand a premium to compensate for the risk of holding them.

All that said, whatever move you make in the new year, your eyes should always be on the yield curve. The focus is harvesting the most yield for your money.

The writer is the Managing Director, Canaan Capital Limited.