Africa-Press – Tanzania. THE Bank of Tanzania (BoT) is revolutionising the bond market by reopening previous auctions for the initially issued government securities.
To start with, the central bank is reopening the 20-year government bond auctioned in February, where bidders will bid using dirty price comprising clean price and accrued interest.
In explanation, dirty price is a bond pricing quote that refers to the cost of a bond that includes accrued interest based on the coupon rate. The dirty price includes accrued interest while a clean price does not.
The key move behind the reforms, according to some debt market analysts, is to increase liquidity in that market as well as lower the borrowing cost of the government which is necessary to lower interest rates in the economy.
Orbit Securities’ Head of Research and Analytics Mr Imani Muhingo said that the BoT want to harmonise the country’s debt market with the rest of East African markets, which are practicing the same and creating a yield curve.
“This is an ongoing effort by the central bank to reform the bond market so as to increase liquidity in that market as well as lower the borrowing cost of the government which is necessary to lower interest rates in the economy.
“This is also done to harmonize with other East African countries that are already familiar with the practice,” Mr Muhingo said told the Daily News on Sunday.
The 20 years bond going under the hammer this Wednesday will have higher prices in the primary market include the accrued interest since the auction is reopening it, which was initially issued in February.
Therefore the Tsh 4.4560 is the interest accrued since the last coupon payment. Thus, based on February’s 20-year bond yield to maturity of 15.412per cent the reopening bid price will be Tsh 104.9287, which comprises clean price of Tsh 100.4727 plus accrued interest.
This also means the winning bidders on Wednesday will be paid a three-month coupon yield next February.
“They [BoT] want to create a conducive secondary market sufficient to create a yield curve,” Mr Muhingo said, “since the yield curve should be market determined”.
The trend as it exists now, the bond secondary market is highly inefficient and inconsistent to develop a yield curve.
“Now the central bank is putting strategies in place, including resurgence of primary dealers of government securities and contributors whose bid-offer prices shall be used to develop benchmark bonds that will be used to develop the yield curve,” the Head of Research and Analytics at Orbit said.
Vertex International Securities, Advisory and Capital Markets Manager, Ahmed Nganya, said the reforms came after a lengthy discussion between BoT and stakeholders to establish yield curve.
“This auction involves reissue of previous [February] 20-year bond, which will be one of the benchmark bonds for calculating yield curve,” Mr Nganya told Daily News.
Vunjo MP Dr Charles Kimei led the discussion and saying the central bank should now lower the returns of the Treasury bonds urging are on higher side.
Dr Kimei, former BoT Director for Research and Policy, and also CRDB Bank Managing Director, said the rates are high since the bonds which are used as benchmark are also high and woo investors due to the fact that the securities are risk-free.
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