Bond acceptance rate jumps to 75pc despite larger offer

THE weighted average yield to maturity (WAYTM) in the 25-year Treasury bond auction increased slightly
by 3.7 basis points (bps), while the highest accepted WAYTM rose by 45.8 bps between the two most recent auctions for this tenor.

The WAYTM for the 25-year auction held on September 4th, 2024, was 15.4188 per cent, with the highest accepted WAYTM at 15.919 per cent. These figures are up from 15.3816 per cent and 15.461 per cent, respectively, in the auction held on June 19th 2024.

Despite the recent auction offering being 38 per cent larger than the prior auction, the acceptance rate stood at
75 per cent, compared to 26 per cent in the previous auction.

The higher acceptance rate allowed for an increased yield to maturity as the central bank accepted 62.5 per cent above the offer size, whereas, in the prior auction, the central bank accepted bids equal to the offer size despite a subscription rate of 384 per cent.

The rising yields are occurring amidst the central bank’s moderately tightened monetary policy stance, which has been in place since June 2024 to counter inflationary pressures arising from foreign exchange challenges. For example, the yield on the 364-day tenor increased from 6.75 per cent in mid-June to 10.83 per cent by
the end of August.

Consequently, interbank money market rates rose to an average of over 8 per cent in August, prompting the central bank to intervene.

To inject liquidity into the banking sector, the Bank of Tanzania began issuing reverse repurchase
agreements (reverse repos) on August 22nd, 2024.

Reverse repos, in contrast to repurchase agreements (repos), are financial instruments used to inject liquidity, while repos are employed to mop up excess liquidity. In a repo transaction, the issuer (in this case, the central bank) sells securities with an agreement to repurchase them in the near future.

Reverse repos operate oppositely, with the issuer buying securities with an agreement to sell them back shortly. As a result, repos reduce liquidity, while
reverse repos increase it.

The total amount of reverse repos issued between August 22nd and September 4th amounted to 700bn/-, with a weighted average rate (WAR) of 8.0 per cent throughout the period.

This follows the 7-days interbank rate averaging higher than 8 per cent in 12 of the 20 interbank trading sessions in the month of August. Moreover, the weighted average 7-days interbank rate for the month of August stood at 8.17 per cent compared to 7.54 per cent in July 2024.

Rising Treasury yields contrast with the central bank’s liquidity injections through reverse repos, as high
yields challenge the sustainability of deposit mobilisation for commercial banks. Elevated Treasury yields
encourage the public to purchase Treasury securities rather than deposit funds in commercial banks.

Additionally, high yields crowd out the private sector, as banks prefer the higher returns of risk-free securities, leading to increased lending rates and reduced borrowing by businesses.

However, this liquidity injection comes as the US Federal Reserve is expected to adopt an expansionary monetary policy in mid-September, with inflation stabilising slightly above its 2.0 per cent target. A higher-than-expected unemployment rate has also raised fears of a recession, motivating potential rate cuts.

An expansionary monetary policy in the U.S. could encourage foreign inflows into developing countries, alleviating foreign exchange challenges and inflationary pressures.

This would reduce the need for central banks in developing economies to tighten their monetary policies to combat import-driven inflation.

Moreover, foreign inflows into emerging and frontier markets are expected to boost equity prices, following significant foreign capital outflows over the past two years.

Given the US’s pending expansionary policy and the Bank of Tanzania’s liquidity injection via reverse repos, we may see limited growth in Treasury yields. This is particularly true as the central bank has already raised 24 per cent more than its aggregate target in Treasury auctions since the start of the fiscal year.

The central bank has room to push back against rising yields to support commercial banks deposit mobilisation.
The upcoming Treasury auctions in September will offer further insight into interest rate trends. The 15-year and 20-year Treasury auctions, scheduled for September 11th and 25th, respectively, will occur before and after the US monetary policy decision in mid-September.

On another note, weekly equity turnover remained below 1.0bn/- for the second consecutive week, declining by 2.18 per cent in the week ending September 6, 2024. The week’s turnover was 685.78m/-, down from 701.06m/- the week before.

CRDB remained the top mover, continuing its trend from previous weeks, with foreign investors accounting for 0.76 per cent of total equity purchases and no participation in equity sales. Net foreign inflow for the week was 5.18m/-.

Total market capitalisation increased by 0.75 per cent, driven by cross-listed counters from Nairobi, while domestic capitalization dipped slightly by 0.01 per cent due to falling prices on DSE and NICOL counters. NICOL
dropped by 2.56 per cent during the week, while DSE declined by 1.64 per cent, with the latter’s price affected by its ex-dividend period since mid-July.