Why govt bond yields jump after auctions

DAR ES SALAAM: GOVERNMENT bond auctions last year appeared orderly, but secondary market trading quickly exposed liquidity stress and timing risks that are reshaping return expectations for investors.

At issuance, pricing appeared stable, with bonds clearing auctions along a normal upward-sloping yield curve and long-dated papers attracting solid demand.

That calm faded in secondary trading, where yields moved higher, most sharply at the short end, pointing to selling pressure and liquidity stress rather than a shift in sovereign risk.

Alpha Capital Chief Executive, Mr Gerase Kamugisha, said the divergence between primary auction yields and secondary market pricing reflects market structure rather than a sudden change in sovereign risk.

“The government is not suddenly riskier a day after issuing the bond,” Mr Kamugisha, a seasoned capital markets analyst, said yesterday.

“What you are seeing is a liquidity premium being demanded by buyers when sellers are under pressure.” According to his analysis, bonds issued during the year cleared auctions at yields consistent with a normal, upward-sloping yield curve.

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Long-dated securities were particularly well received. The 25-year bond cleared at a yield to maturity of 13.19 per cent, while the 20-year bond settled at 12.02 per cent. Mid-tenor instruments priced slightly lower and short-dated bonds clustered near 10 per cent, signaling confidence in macroeconomic stability and fiscal credibility. That confidence weakened once trading shifted to the secondary market, he said.

On the first trading day, the 25-year bond traded at 13.21 per cent and the 20- year bond at 12.04 per cent, modest increases, but enough to indicate selling pressure. The repricing was sharper further down the curve.

The 10-year bond jumped to 13.52 per cent, while the two-year bond surged to 21.29 per cent, highlighting acute stress at the short end of the market. Mr Kamugisha said this pattern reflects the dominance of buy-andhold investors, mainly pension funds and insurance companies, at primary auctions, where long-term liabilities align well with government securities. Secondary trading, however, is driven by participants who may need to exit positions quickly.

“When institutions rebalance portfolios, meet short-term cash needs or respond to regulatory limits, they may be forced to sell,” he said.

“In a shallow market, prices adjust abruptly. If you need cash urgently and there are few buyers, the yield has to rise to attract interest.” The sharp rise in yields on short-dated bonds runs counter to textbook finance, which treats such instruments as lower risk due to shorter duration. However, Mr Kamugisha said Tanzania’s market realities tell a different story. “In markets with limited depth, short-term instruments can be more volatile than long-term ones,” he said.

“They are assumed to be safer, but when liquidity dries up, they can be harder to sell at a fair price.” The gap between auction and secondary pricing complicates return expectations.

While auction yields appear predictable, secondary market outcomes depend heavily on timing. Investors forced to sell early may realise losses even when the underlying credit remains sound.

Comparisons with equities further underline this trade-off. Last year, the Dar es Salaam Stock Exchange All Share Index rose by nearly 28 per cent, well above government bond returns. However, those gains came with volatility that many income-focused investors are unwilling to tolerate.

“Bonds are not meant to outperform equities in strong market years,” Mr Kamugisha said.

“They are about income certainty and capital preservation and their value shows over full market cycles.” Collective investment schemes offer a partial solution. Bond-focused unit trust funds delivered returns of about 13 per cent, broadly tracking longterm government yields while smoothing liquidity and reinvestment risks.

According to Mr Kamugisha, professional fund managers are better positioned to manage duration exposure and stagger liquidity needs. He added that the yield curve remains a valuable signal, but only when read carefully.

“It is telling you two stories at once, one about macro stability and another about liquidity risk,” he said. “Ignoring either is a mistake.” Last year, government bonds delivered steady income rather than spectacular gains.

They rewarded patience at longer maturities and penalised poor timing in thin secondary markets, underscoring the importance of understanding how returns are realised beyond the auction stage.