Africa-Press – Tanzania. Bank of Tanzania (BoT) has said it will continue to reopen Treasury bonds that attracted more bids as a way of reforming and transforming the debt market in the country.
The central banks will reopen bonds that were highly oversubscribed, especially 20 and 25 years, to among other things, enable debt investors whose bid failed to go through to buy them. BoT Director of Financial Markets Alexander Ng’winamila told Daily News at the sideline of the 20th Conference of Financial Institutions in Dodoma that the aim is also to let investors re-tender the bond in near future.
“We will observe the trend of the oversubscribed bonds and explore the option of reopening them in between three and six months after being auctioned off,” Mr Ng’winamila said. He said a single bond might be reopened many times based on the oversubscription pattern during the auctioning.
“We want to let those with the huge amount which failed to go through during tendering process to re-bid same bond. “But also we want to reduce the number of government bonds series outstanding in the market,” the director of financial markets said. Also, the reopening aims to enhance the liquidity of bonds targeted to serve as benchmarks and develop a yield curve.
There are chances that the central bank may reissue the first bond to be reopened last Wednesday again next February based on its oversubscription.
The 20 years Treasury bond was heavily oversubscribed to register a historically high amount of oversubscription since the debt market was introduced about two decades ago. Zan Securities Chief Executive Officer Raphael Masumbuko said the first reopened government instrument became the most subscribed auction in history after attracting 661bn/-.
“The auction results set an overtone on investors’ appetite towards government securities as every auction dwarfs a preceding one,” Mr Masumbuko said.
The last Wednesday auction result showed that out of 1341 total bids 213 were successful equals 14 per cent. Despite the high bids, the BoT rejected bids which they deemed aggressive, taking up only 129bn/-ultimate reducing the government’s borrowing costs.
The weighted average yield to maturity recorded was 14.74 per cent quite lower than the bonds coupon rate of 15.49 per cent. The reopening auction is the offering of new bonds with the same maturity and coupon as an existing issue.
In this context the Treasury bond reopened for this auction was originally issued for the first time on 10th February 2021. Unlike conventional Treasury bond auctions, the reopened bond will have a different issue date and different purchase price based on current market yields however it will share the same maturity date and coupon interest rate as the original bond.
the central bank can reduce its debtservice costs through measures such as auction reopenings that promote the development of deeper, more liquid government securities markets by concentrating on a relatively limited number of maturities.
“Market participants are typically prepared to pay a premium for a security that can be subsequently traded in a more liquid market,” Mr Masumbuko said.
Over-subscription of the 20 year treasury bond comes with no surprise. When it was first auctioned in September 2018 the minimum price of the 20-year bond an investor could buy a 100m/- million for 82m/-, meaning the price was 82/-.
The first 20 years bond
The total amount tendered by investors in that auction was 61bn/- which is a polarizing figure compared to today’s 661bn/- at reopening last Wednesday at 108/2275. Also, analysts have it that bonds prices have changed because investors have also changed.
Three years ago a lot of effort was needed to entice investors to buy treasury bonds, which had not fared well compared to the stock market whereby stocks had high returns. They said what has brought about this change is the low dividend yields in the stock exchange that stands on averaged around 7.0 per cent compared to a risk free interest rate of 15.49 per cent offered by the 20 year Treasury bond.
Auctions for the long term treasury bonds (20 and 25) have been oversubscribing since their respective introductions in the financial markets prompted by their attractive coupons and subsequent liquidity in the secondary markets which makes it attractive for investors.
For example, the 20-year bond accounted for 33 per cent of trades in the secondary market last month. “However,” Mr Masumbuko said, investor flight towards fixed income securities comes with peril to the economy, as this crowds out much needed funds for the private sector.”
The dark side of huge participation in the debt market is that commercial banks use excess liquidity which could potentially be lent out to the private sector subsequently lowering lending rates.
Nevertheless, last week, Tanzania Bankers Association (TBA) at COFI at Dodoma, announced that some banks will start lowering lending yield anytime from now.
TBA Charman Abdulmajid Nsekela told the 20th Conference of Financial Sector (COFI) yesterday that the banking sector as part of society wants the market to have affordable interest rates to push the economy forward.
TBA Charman Abdulmajid Nsekela told COFI last week that the banking sector as part of society wants the market to have affordable interest rates to push the economy forward.
“After making a loan simulation, to determine how low we can go, the banks now are ready to lower interest rates…in coming days you will see some starting lowering the rates,” Mr Nsekela, who is also a CRDB Bank managing director, said.
The currently average lending rates of around 16 and 18 per cent make it harder for businesses to make a profit resulting in high nonperforming loans (NPLs) levels in the economy. Recently announced in its bimonthly BoT’s Monetary Policy Committee meeting that it still intends to employ accommodative monetary policy.
Three years ago a lot of effort was needed to entice investors to buy Treasury bonds, which had not fared well compared to the stock market whereby stocks had high returns. However, the introduction of the 20 year Treasury bond in 2018 and the subsequent introduction of the 25 years changed the trend considerably.
“It’s hard to ignore Treasury bonds when the 20 and 25 Treasury bonds are offering 15.49 per cent and 15.95 per cent annual interest respectively,” Mr Masumbuko said.
The weighted average price of the 20 year Treasury bond in its first auction was was 87/90, the shift in tide is visible as prices began trading in premium within three years.
Primary and secondary market yields on similar or identical instruments are highly correlated, high prices in the primary market will subsequently affect price in the secondary market, and this upward linear trend is expected to stick as the market heads into the next calendar year.
A debt market analyst, Mr Imani Muhingo told Daily News that the BoT wants to harmonize the country’s debt market with the rest of East African markets which are practising.
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