Markets in Kenya bounce-back after a brief slowdown in December

Kenya's fixed income markets are experiencing a resurgence in investor confidence as interest rates continue to soften, with yields on short-term papers showing slight increases. This trend has seen investors turning their attention to short-term securities, particularly the infrastructure bond issued by the Central Bank of Kenya in February, which received high subscription rates due to its attractive returns and tax-free status. Both local and foreign investors have shown significant interest in this bond, setting the stage for heightened activity in the fixed income markets. As 2025 unfolds, there is an anticipation of a shift towards the equity market, driven by declining interest rates on traditional fixed income securities. However, the high valuation of blue-chip and value stocks presents challenges for investors seeking entry positions, prompting some to maintain their cash in fixed income securities. This cautious approach is reflected in instances of over-subscription, such as the 138 percent over-subscription recorded on treasury bills in the second week of January. Despite the allure of the equity market, the expectation of continuing rate reductions poses a dilemma for investors, who must navigate the trade-off between lower returns and reduced risk in fixed income investments. Addressing the broader economic landscape, senior research associate Stellah Swakei highlighted the stable economic momentum as 2024 drew to a close. While the economy has made progress in stabilizing key indicators, there are lingering effects from recent challenges, including rising interest rates, inflation, and shilling depreciation since early 2023. Notably, inflation has seen a significant decline, recording its slowest pace in over a decade, indicating a positive trajectory in consumer prices. Factors such as robust reserves and reduced external pressures in 2025 bode well for the shilling's stability, supported by anticipated disbursements from the IMF, World Bank, and other sources. Despite the overall outlook of stability, internal risks like the finance bill present potential obstacles, requiring a balanced approach to policy adjustments to foster economic growth and tax collection. Looking ahead, projections suggest a leaner finance bill amidst expectations of around $325 billion in government expenditure. Swakei emphasized the importance of tax policies conducive to business growth, reflecting on past challenges that led to closures and staff reductions in the previous year. In light of these considerations, the forthcoming decisions on pump prices for January prompt a hopeful outlook, with indications pointing towards potential declines given stable shilling performance and international price trends. Swakei's assessment suggests a likely scenario of price reductions, though the possibility of unchanged or increased prices also remains on the radar.