Why T-bills are in demand despite modest returns

Dar es Salaam. With the government maintaining low-cost domestic borrowing, oversubscription of Treasury bills has persisted even as yields on these short-term securities remain comparatively low.

Investment returns through the government’s one-year Treasury bills are currently at 9.2 percent, the lowest in East Africa.

In comparison, the average interest rate for 364-day Treasury bills in Kenya is 15.6 percent, while it is 12.8 percent and 9.7 percent in Uganda and Rwanda, respectively.

Despite the low yields, data from the Bank of Tanzania’s monthly economic reviews shows oversubscription of Treasury bills from January to September 2023.

The central bank conducted auctions with a total tender size of nearly Sh2.61 trillion during the period, with bids received amounting to over Sh3.41 trillion.

Analysts suggest that investors may be prioritising safety and liquidity over higher returns, given the uncertain financial market environment across the region and globally in general.

Alpha Capital head of research Imani Muhingo said investors’ appetite for Treasury bills remained high with local traders avoiding forex risk exposure in foreign markets.

Treasury bills investors, including social security funds, investment funds, banks and insurance firms, have shown preference for short-term returns in the local currency.

“In Tanzania, the appetite remains strong due to the safe bet and familiarity. Comparatively, in neighbouring countries, markets have been exposed to significant forex risks. Therefore, even if the interest rates are higher elsewhere, there are still many risks,” Mr Muhingo said.

Due to inflationary pressures, Kenya’s central bank adopted the high-interest rate regime to anchor inflation that had impacted the Kenyan shilling.

Financial market expert Mohamed Warsame said the Tanzanian financial market experienced a stable monetary policy this year and its tightening was not as significant as in neighbouring countries, resulting in stable interest rates.

He said the neighbouring countries had faced higher interest rates due to unfavourable exchange rates in recent times attributed to rising inflation rates and global concerns about the dollar.

“Our currency has depreciated less compared to those of other countries in the region. With a better monetary policy, we have also been able to control inflation,” Prof Warsame added.

According to the BoT’s economic bulleting for the July-September 2023 quarter, the country’s headline inflation averaged at 3.3 percent, a decline from 4.6 percent recorded in the corresponding quarter in 2022. The slowdown in inflation was mainly driven by moderation in prices of food and energy items.

Prof Warsame said, “It is also correct that the current interest rate on treasury bills indicates that the government is borrowing at a favorable cost, leading to cost-effective loan repayment in the budget.”

According to the central bank, by September this year, the domestic debt stock had reached Sh29.44 trillion from Sh25.54 trillion in September 2022.

BoT links the rise to increased issuance of government securities Treasury bills and Treasury bonds, which accounted for 85.2 percent of the domestic debt stock, while commercial banks and pension funds sustained their dominance in terms of credit to the government.