Beyond the yield curve: The Tanzanian investor’s appetite for stability

IN the week ending September 13th, 2024, Tanzania’s secondary bond market was heavily dominated by long-term Treasury bonds.

The 25-year and 20-year bonds, offering yields between 15.40 per cent and 15.09 per cent, accounted for the majority of the total turnover. Specifically, the 25-year bonds contributed 64.56 per cent of the total Treasury bond turnover, while the 20-year bonds added another 15.96 per cent.

Together, these two long-term instruments comprised over 80 per cent of the total turnover in the Treasury bond segment for that week.

This dominance wasn’t isolated to just one week; throughout August 2024, long-term bonds consistently led market activity, highlighting a clear investor preference for these instruments that offer both stability and consistent returns.

So why are long-term bonds so appealing to Tanzanian investors?

The answer lies in the unique advantages these instruments provide, especially in the context of wealth-building, securing stable cash flow and mitigating risk.

Both institutional and individual investors gravitate towards long-term fixed-income securities because they offer unparalleled financial predictability and security.

In a market where yields fluctuate and economic conditions create volatility in shorter-term instruments, locking in a stable, high yield for 20 to 25 years becomes a highly effective hedge against uncertainty.

One of the primary reasons for the preference for long-term bonds is their ability to guarantee a steady income stream over an extended period.

With yields above 15 per cent, these bonds allow investors to lock in a substantial return on their capital—an invaluable advantage in an economy where inflation can erode the value of more volatile assets.

Investors seeking to build a reliable, long-term financial plan can count on these regular interest payments, structuring their portfolios around predictable cash flows rather than chasing short-term gains.

Moreover, large institutional investors like pension funds and insurance companies consider long-term bonds essential for aligning their assets with future liabilities. These institutions face long-term commitments, such as pension payouts and insurance claims, which may not materialise for years or even decades.

Holding long-term bonds allows them to secure the cash flow required to meet these obligations, shielding them from the uncertainties of short-term market fluctuations. The same principle benefits individual investors, especially those nearing retirement or looking to safeguard their financial future.

Long-term bonds not only offer liquidity but also provide a reliable income stream, helping individuals navigate their retirement years with greater financial stability, free from the volatility typically associated with equities and other high-risk investments.

Another major factor driving demand for long-term bonds is their ability to protect against interest rate fluctuations. Shorter-term instruments are far more sensitive to changes in interest rates, which can cause significant price swings and reinvestment risks.

Investors holding short-term bonds may be forced to reinvest their principal at lower interest rates when their bonds mature.

In contrast, long-term bondholders enjoy the benefits of a locked-in rate, ensuring that they continue receiving the high yields secured at the time of purchase, regardless of changes in the interest rate environment over the coming decades.

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On the other hand, the market for shorter-term government instruments—such as 15, 10, 7, 5 and 2-year bonds, as well as corporate bonds ranging from 2 to 10 years—faces a unique challenge.

While these instruments offer quicker returns due to shorter maturities, they are often overshadowed by the demand for long-term bonds, as investors prioritise stability and long-term wealth creation

One key factor contributing to this imbalance is the lack of financial literacy regarding the potential of short-term bonds to capitalise on yield fluctuations

Many investors may not fully grasp how shorter-term bonds can offer faster returns when interest rates rise, thus missing out on potential opportunities in the market.

This knowledge gap impairs the liquidity of shorter-term instruments, with investors tending to favour long-term bonds for their perceived safety. To improve market dynamics for short-term bonds, issuers should focus on investor education, economic conditions and aligning short-term instruments with financial objectives.

Offering tailored financial education programmes that emphasise the advantages of shorter-term bonds in volatile environments could attract more liquidity to this segment.

Additionally, creating more attractive terms for shorter-term bonds—such as competitive interest rates and greater flexibility—could better align these instruments with investors’ immediate financial goals, enhancing market activity and diversifying the bond landscape.