Bond auction tests appetite amid easing

DAR ES SALAAM: THE fixed-income market faces a key test as the Bank of Tanzania launches a 25-year Treasury bond with a sharply reduced coupon, a move that could reshape investor appetite for long-dated government securities amid the central bank’s easing drive.

The BoT will auction 264.31bn/- through the competitive window and 29.37bn/- via the non-competitive window.

What has drawn attention is the coupon rate of 13.75 per cent, a marked drop from recent issuances.

Earlier this month, a 20-year bond was issued at 14 per cent, while the 25-year paper sold in August carried a 15 per cent coupon.

Alpha Capital’s Geofrey Kamugisha said the 125-basis-point rate cut over two months highlights the central bank’s commitment to lowering yields and signals an easing policy stance.

He noted that investors expected a 15 per cent coupon on the 25-year bond reopening but were surprised by the 13.75 per cent forcing a recalibration of return expectations.

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For the government, lower coupons reduce long-term financing costs and support falling yields. For investors, returns narrow, but long-term institutions may benefit from stable yields if reduced competition lowers bidding intensity.

Analysts anticipate strong participation due to ample liquidity, though bidder profiles may shift as some reduce activity while others seize opportunities.

Mr Kamugisha described the auction as a ‘litmus test’ for investor confidence in the BoT’s easing path.

Robust demand despite lower coupons would signal trust in monetary policy, while weaker uptake could indicate limits to yield reductions without dampening appetite.

Zan Securities Advisory and Research Manager Isaac Lubeja said investors are likely to respond in a mixed manner.

“Long-term institutional investors such as pension funds will continue to participate, since they require these long-dated securities regardless of the coupon,” he said.

“However,” Mr Lubeja said, “with the sharp reduction in coupon, we may see some investors redirecting their allocations toward shorter-duration bonds that offer nearly equal or more attractive yields, thereby improving risk–return balance.”

Mr Lubeja added that the secondary market may see some short-term downward pressure on yields as existing holders mark their positions relative to the new issuance levels.

Over time, however, if the central bank maintains its easing stance, secondary yields are likely to stabilise at lower levels along the yield curve.

Vertex International Securities Advisory and Capital Markets Manager Ahmed Nganya said they expect investors to respond positively despite the coupon reduction from 15.75 per cent to 13.75 per cent.

“Looking a few auctions back for the similar tenor, one would notice that prices had already started to move to premium, a similar occurrence in secondary market trades.

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“We think the decision to reduce coupon might correct bond price to reasonable levels.

“We expect investors to bid at slight discounts to offset coupon loss, pushing the weighted average yield to about 14.00 per cent,” he said.

The upcoming auction will gauge demand for long-term securities and investors’ willingness to align with the BoT’s policy direction.

Amid abundant liquidity, the challenge is balancing lower yields with investors’ need for stable returns—a crucial test of confidence in the easing cycle.