BoT tilts toward long-term bonds

DAR ES SALAAM: THE Bank of Tanzania (BoT) is shifting its debt strategy toward longer-term instruments after the latest 25-year Treasury bond auction attracted overwhelming demand, with bids far exceeding the amount on offer despite a lower coupon.

The BoT will reopen the 10-year Treasury bond this Wednesday instead of the usual two-year paper, as per calendar, a move analysts said reflects efforts to extend the maturity profile of government debt while balancing investor appetite.

The central bank auctioned a 25-year government bond mid-last week with a coupon of 13.75 per cent. The rate was 125 basis points lower than the 15 per cent set on the same tenor six weeks ago and 25 basis points below the 14 per cent offered on the 20-year bond earlier this month.

“Despite this aggressive downward adjustment, investor demand was overwhelming,” Alpha Capital Head of Business Development and Customer Service Mr Geofrey Kamugisha said yesterday.

Investor tenders approached 980bn/- against an offer of 264.3bn/-, leaving the auction oversubscribed by more than 700bn/-.

ALSO READ: Barrick internship enhances education, skills development

However, in line with its strategy, the BoT only accepted the planned amount, with 264.3bn/- in successful bids. The weighted average yield settled at 13.19 per cent, marking a drop of about 60 basis points from the previous auction.

Mr Kamugisha said the very next day, the central bank announced a 10-year bond reopening for this Wednesday, carrying a 13.5 per cent coupon.

“This was a departure from the published issuance calendar, which had scheduled a 2-year bond reopening,” Mr Kamugisha said:

“The deviation suggests the central bank is possibly tilting issuance toward longer maturities, where demand is more robust, while simultaneously pushing yields downward more aggressively at the long end of the curve”.

This aligns with the BoT’s August monthly report, which noted undersubscription in 2- and 5-year auctions contrasted with strong demand for 10-year securities. “The implication appears to be that investors prefer to lock in yields over longer horizons, possibly anticipating that interest rates will continue to fall. Treasury bill auctions further reinforced this narrative,” he said.

Meanwhile, he said fixed income markets are experiencing strong demand, with over-subscriptions, declining yields and a central bank that is pressing the pace of monetary easing more forcefully than anticipated.

“As a result, yields across the curve are falling, liquidity is abundant and capital is being channeled toward instruments that balance safety with duration,” Mr Kamugisha said.

Last week, Zan Securities Advisory and Research Manager Isaac Lubeja projected that 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,” Mr Lubeja said.

However, he 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”.

And, Vertex International Securities, Advisory and Capital Markets Manager, Ahmed Nganya, said they are expecting investors to respond positively to the 25-year bond despite a reduction in coupon 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.

“We think the decision to reduce coupon might correct bond price to reasonable levels,” he said.

For fixed income, the central bank’s assertive strategy indicates that the easing cycle still has room to run and investors are responding by locking in positions before yields compress further.