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Why investors now eye longer-term bonds

Saturday December 04 2021

Longer-term Treasury bonds continue to attract more demands of investors despite a decline in the returns, amid improving liquidity.

 

IN SUMMARY

  • The recent auctions of the 20- and 25-year bonds experienced some record subscriptions as investors rush for the fixed-income government securities.
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Dar es Salaam. Longer-term Treasury bonds continue to attract more demands of investors despite a decline in the returns, amid improving liquidity.
The recent auctions of the 20- and 25-year bonds experienced some record subscriptions as investors rush for the fixed-income government securities.
In the latest auction of the 20-year Treasury bond on November 24, the Bank of Tanzania wanted to raise Sh139 billion, but it received 341 bids worth Sh661 billion - the highest amount ever tendered for a single Treasury bond auction in Tanzania’s history.
This comes even as the maturity yields for the 20-year bond dropped to 14.74 percent from 15.41 percent during the first auction in February this year.
When the 25-year bond started this year, it attracted subscriptions worth Sh325.65 billion against an offer of Sh86 billion.
In the following auctions in August and October 2021, the bond’s yields to maturity dropped from 16.33 percent to 15.85 percent and 15.48 percent respectively.
The drop in yields means investors’ return dropped while the government is relieved in terms of the cost of borrowing.
Brokerage firm Zan Securities chief executive officer Mr Raphael Masumbuko said that the oversubscriptions of the Treasury bonds signal that investors are competing for fixed income yields as the central bank continues to implement accommodative monetary policy that seeks to increase money supply and reduce lending rates.
“Talks about a potential haircut in Treasury bond coupons will put pressure on auctions as investors want to lock themselves in against a backdrop of a potential reduction in coupons,” he said.
Director of Arch Financial and Investment Advisory Limited, Mr Mazengo Kasilati said although the yields in bonds were declining, they were still high compared to what investors would earn as dividend from equities.
Trading of the bonds in the secondary market shows high appetite. This week, the Dar es Salaam Stock Exchange (DSE) traded bonds valued Sh2.14 trillion, according to the DSE chief executive officer Mr Moremi Marwa.
He said the volume of trading is higher than Sh2.12 trillion that was traded for 2020, and Sh1.91 trillion that was traded in 2019.
“This was attributed to the increased financial literacy, as well as the introduction of the 20 and 25-year bonds in the market,” said Mr Marwa.
The DSE boss also stated that another important factor in the market is the increased participation of retail investors.
“At the bond market segment, retail investors have increased from 2,583 in 2018 to 8,058 investors in 2021,” he said.
Mr Marwa said the retail investors have progressively increased over the past five years, breaking the tradition of depending on big institutions to trade at the bond market.
“Also due to Covid-19 pandemic, investors continue to venture into avenues that guarantee returns,” said Mr Marwa.
 

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