Why fall of Tanzania bond yields matters to economy

Dar es Salaam. The returns on government bonds are now trending at the lowest in ten years, signalling cheaper financing for government on the one hand - and lower returns to investors on the other.

According to the Bank of Tanzania (BoT), Treasury bonds are long-term debt instruments with a maturity period of more than a year, and pay interest on semi-annual basis. Treasury bonds issued by the central bank are in six maturities of two, five, seven, ten, 15 and 20 years.

The slowing cost of borrowing in the government comes as dealers report increased demand for the long-term government securities in which the government borrows through to finance budget gaps.

The downward trend of the weighted average yields was observed in all bonds, which the experts say, were pushed by improved liquidity and difficulties in businesses in recent years that compel the investors to turn to the risk-free government securities as the alternative avenue.

According to data gathered by Insights – an advisory platform which has records of various data about Tanzanian financial markets, banks, macro-economy and industry among others – yields in some of the bonds are the lowest since the maturities started.

For instance, the weighted average yields in the 20-year bond was 15.39 percent on December 16, 2020, according to the Bankable Insights. The first auction of the bond on September 12, 2018 had attracted the return of 17.69 percent. The yield have been slowly downing to the current rates.

The 15-year bond recorded the average yields of 13.57 percent on January 27, 2021 – the lowest ever since it started on November 13, 2013 at 16.64 percent. The 10-year bond had yields of 11.56 percent on December 30, 2020. On June 2, 2010, the same bond attracted the return of 11.79 percent and went up to a climax of 18.84 percent on April 13, 2016.

Why rates matter

“We would not like to see them going too much up but when you see these returns going down like this, they signal something in the economy and definitely it is not pushing full force. We recently witnessed some sectors like tourism and transport shaken by the pandemic,” said Prof Delphin Rwegasira of the University of Dar es Salaam’s Economics department.

His comment was echoed by the capital market dealers who said more people were putting money in the government securities as the alternative avenue while other businesses were shaking.

“We recently witnessed increased number of bids in the long-term government debts,” said Mr Raphael Masumbuko, the chief executive officer of brokerage firm Zan Securities.

“The challenge is firms are not doing well and that is increasing the appetite for the government securities which are risk-free. As the demand is growing, the yields go down to reflect the principle of demand and supply,” said Mr Masumbuko.

He also said Tanzania economy was growing fast in recent years and the trend creates more liquidity which channelled to the bonds as an investment avenue. He said the awareness about the bond markets was increasing in Tanzania and that increased the number of investors in the government securities.

“The government is benefiting by getting cheaper financing,” said Mr Juventus Simon, general manager at brokerage firm Orbit Securities. “So, when investors are getting less returns, it’s a positive story to the government,” he said.

The lower yields also discourage people to lend to the government but according to Mr Masumbuko, that is good because the money will be channelled to businesses and probably create more jobs.