Why investors’ yields on govt securities are falling
Dar es Salaam. Government bond yields are on a downward spiral due to investors’ rising demand for risk-free securities amid a drop in their appetite for other investment avenues as the world battles the Covid-19 pandemic.
Auction summaries by the Bank of Tanzania (BoT) show that during the first four months of 2020, the weighted average yields at maturity for the 15-year Treasury bonds shrunk from 15.19 percent in January to 14.18 percent in April.
Similarly, total weighted average yield for Treasury bills reached 4.94 percent in April, lower than the 5.48 percent offered in January.
Financial markets analysts say government securities were being viewed as a safe bet for investors who had lost interest in other investment avenues due to the impact of the new coronavirus malady.
This has had an impact on the pricing of government securities - hence affecting returns on investments.
“A rise in demand for T-bonds and T-bills is sending prices higher. A rise in bond prices thus affects the yields which investors collect upon maturity of their bond investments,” said the director of Arch Financial and Investment Advisory Limited, Mr Mazengo Kasilati.
Like any other financial asset, bonds are affected by the market forces of demand and supply. Bond prices rise when demand outweighs supply - and fall when there is insufficient demand.
“The yields or returns on the bonds fall when its price increases - and rise when the price falls,” Mr Kasilati added.
The Zan Securities chief executive, Raphael Masumbuko, said that, during the bidding process, investors try to win the offered bonds by tendering at a higher price - thus diminishing returns on the investment.
“When there is high demand, investors will want to win the bond by tendering at a high price. For instance, if an investor bids at 95/100 and becomes unsuccessful, he/she will bid higher - at 97/100 or 98/100 - in the next auction, which means his returns will also decrease,” he said.
He said chances were that maturity yields will be going even lower as more and more investors rally toward long-term securities.
