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DEVELOPMENTS WITH THE STOCK MARKET AND FIXED INCOME

The month of July depicted a significant decrease of 33.81% in turnover from kes 95.2
billion traded in June to kes 63.01 billion. The month of June 2010 represented a boom in
bond trading as most traders speculated a fall in the interest rate .The drop during the
month of July was basically attributed by market anxiety on the direction of interest rates
as most fixed income players felt there was great chance for rebound on the level of
interest rates hence most preferred to shy away from the market.

Government and corporate bonds turnover for the month of July was down by kes 62.6
billion and 0.9 billion from kes 93.5b and 1.8b respectively in the month of June. There
was also a high demand for 10 and 15 year bond and they traded a total of kes 7.9b.The
actively traded corporate bond was ken Gen with a total of 735M and MRM bond trading
a total of 100M.

The government in the Month of August has invited bids for the 9 year infrastructure
bond to mature in 2019.They tend to raise 31.6b basically meant to finance infrastructure
projects in road ,energy and water paying. The bond pays a coupon of 6%. The paper
looks attractive compared to similar papers with the same tenor. We expect good
volumes in the secondary market

T-bill rates fell from 2.63% and 2.45% at the end of June to 1.69% and 1.99% at the end
of July for the 91 day and 182 day respectively. The recent 182 day t bill auction was
undersubscribed by 39% and cbk maintained its rate at 1.99%.The 364 T bill also fell
from 4.199% to 3% with a subscription rate of 41%.

This years budget the government expects a total budget deficit of kes 167.2 billion
(16.7% of the total budget) increasing by 8.2% from 2009/10 which stood at kes 153.5 =
billion. The government plans to finance this deficit through sale of government
securities amounting to 73.7 billion .The IFB bond will raise 31.6B and 61 .34b will be
financed through deferring of domestic debt while the balance 0.48b will be financed
through debt swap.

Despite the current expansionary policy adapted by the government we still hold the view
that increased borrowing will not have a significant impact on the current levels of
interest rates. We hold the view that cbk has a direct control of banks by morally pursing
banks to lower the rates and also will continue injecting money supply through reverse
repos to stabilise rates if commercial banks do not adhere… (Note cbk holds crr from
commercial banks at 0% of which they can effectively fund short term inter bank deficits
at low rates through reverse repos)
On Equities,
Performance in the domestic market was buoyant as increased appetite for equities
fuelled a rise in equity prices. Both markets indices recorded gains with NSE 20up
108.66 points to close at 4.438.58 points the NASI settled at 97.74 points, 2.18 points
higher. There is a belief that the increasing appetite for equities could serve drive prices
further upwards. The peaceful referendum campaigns seem to have provided impetus of a
favourable political climate post referendum. We expect to see increased participation in
the equities market taking cognizance of the low returns expected within the fixed
income.