BoT out to restore appetite for medium-term bonds

DAR ES SALAAM: THE Bank of Tanzania (BoT) has raised the coupon rate on a 10-year Treasury bond to 14 per cent, the highest in recent auctions, in what is seen as a strategic measure to restore investor interest in medium-term bonds.

The central bank announced that today’s auction for a 10-year treasury bond offers a 14 per cent coupon rate—the highest in recent auctions compared to the previous rates of 10.25 per cent and 11.44 per cent.

Alpha Capital’s Head of Business Development and Customer Services, Geofrey Kamugisha, told Daily News yesterday that in last week’s 25-year government bond auction, the central bank maintained bond yields despite lowering the coupon rate from 15.95 per cent to 15.75 per cent.

The Bank of Tanzania (BoT) is taking decisive steps to restore investor interest in medium-term bonds, aiming to align with current market conditions and stimulate demand in the bond market.

“This, alongside the 14 per cent coupon rate announced for the 10-year bond, signals that the central bank may be open to accepting higher yields or similar yields to those observed in recent 10-year bond auctions,” Mr Kamugisha said in his column—Financial Markets Digest.

The 14 per cent coupon rate, according to some debt market analysts, is poised to serve as a benchmark for future government securities, particularly in the 10-year segment.

Private sector issuers may need to offer higher yields to remain competitive, potentially increasing the overall cost of capital for long-term debt financing.

Vertex International Securities Research and Analytics Manager Beatus Mlingi said the BoT’s decision, reflecting market dynamics and investor sentiment, introduces significant implications for both the debt market and long-term debt instruments.

“This strategic adjustment is poised to shape investor behaviour, market valuation and fiscal dynamics in notable ways,” Mr Mlingi said.

He further stated that the 14 per cent coupon rate presents an attractive proposition, particularly in a market where long-term instrument yields must compete with inflation and alternative investment opportunities.

“This competitive rate is likely to drive heightened demand during the auction, with institutional investors such as pension funds, insurance companies and asset managers showing particular interest in its steady returns,” the Vertex Manager said.

However, he warned that the higher rate could also “instigate a repricing of existing long-term debt instruments” in the secondary market.

Hence, bonds with lower coupon rates may face price adjustments discounting as their yields realign with the new market benchmark, potentially affecting the valuation of portfolios holding older bonds.

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By adjusting the coupon rate, the BoT sends a strong signal of its commitment to ensuring government securities remain competitive.

However, increased interest payments could significantly add to the national debt servicing burden, necessitating careful fiscal management to maintain sustainability. Zan Securities Advisory and Research Manager, Isaac Lubeja, said last month that BoT changed its approach to determining coupon rates for Treasury bonds, shifting to a market-driven mechanism.

“This adjustment could boost demand for mediumterm bonds, which have previously seen weak investor interest,” Mr Lubeja said, adding: “Appetite for these securities has been so low that the central bank discontinued issuing the 7-year bond, leaving only the 5-year and 10-year options.”

Even so, he noted that these bonds have struggled, with the 10-year bond last achieving 100 per cent subscription in April 2024, the first time since August 2020.

Additionally, Mr Lubeja said, since this change, the first Treasury bond issued under the new system the 25-year bond experienced a drop in its coupon rate from 15.95 per cent to 15.75 per cent.

“This move is not expected to significantly impact other maturities but could enhance activity in the mid-range of the yield curve, leading to greater liquidity and improved price discovery,” he said.

The country’s inflation is projected to be around 3.0 per cent in 2024. In such a low inflation environment, bonds with competitive coupon rates, like the 14 per cent offered on the 10-year bonds, become more appealing to investors, as their real returns are less likely to be eroded by rising prices.

On the other hand, the GDP growth is projected at 5.4 per cent for 2024, indicating healthy economic expansion.