Debt markert signals both opportunity, fiscal stress

THE fixed-income market is sending mixed signals to investors and policymakers. The Bank of Tanzania (BoT), last Wednesday, auctioned a 20-year government bond, offering 244.008bn/- to the market. Investors responded with overwhelming demand, tendering 829.484bn/-, more than three times the offered amount.

Yet the central bank accepted only the exact offer, consistent with its recent policy of limiting excess liquidity absorption. The auction cleared at a Weighted Average Yield to Maturity of 13.5510 per cent, down nearly 95 basis points from the previous 14.5 per cent.

Alpha Capital Head of Business Development and Customer Service Mr Geofrey Kamugisha said that oversubscription in both long-term bonds and T-bills reflect this same abundance. “Investors, anticipating a continuation of the easing cycle, are deploying liquidity into government securities as both a defensive allocation and a yield lock-in strategy,” Mr Kamugisha said, yesterday.

Short-term money markets mirror this dynamic: The 7-day IBCM rate, actively managed by the BoT, has been trending lower, reinforcing the perception of abundant liquidity. The preference for long-term Treasury bonds, particularly at a 14 per cent yield, reflects both strategic and economic considerations.

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“The shape of recent Treasury bill auctions reinforces this,” Mr Kamugisha said, “while short-dated and long-dated bills attract heavy demand, mid-tenor instruments (91 and 182 days) must clear at relatively higher yields, producing a humpshaped curve that speaks to both liquidity management needs and investor expectations for lower rates over the next year.” He said investors are rotating toward safer assets in response to heightened uncertainty, even as the central bank’s easing bias supports a longer-term narrative of declining yields and more favourable equity valuations.

Dr Hildebrand Shayo, economist-cum-investment banker, said the 20-year maturity also aligns with long-term capital projects, allowing smoother amortisation schedules and underlining the appeal of fixed returns amid fiscal and inflationary pressures.

Though “paying down this debt over 20 years will greatly deplete Tanzania’s budget, potentially reducing public investments or requiring stricter fiscal measures,” Dr Shayo said.

However, this investor enthusiasm comes with trade-offs. Furthermore, the 14 per cent yield now serves as a benchmark for other debt instruments, including corporate bonds and project finance, which could increase borrowing costs across the economy.

Additionally, last week secondary bond market activity further underlined this appetite. The total face value of bonds traded surged by 336.48 per cent to 252.22bn/- from the prior week, with the 15-year government bond carrying a 13.50 per cent coupon accounting for most turnover.

Even corporate bonds, such as Azania Bank’s 3-year issue, saw modest trading, signalling that while sovereign paper dominates, private sector debt has not been entirely ignored. “This participation, though limited, signals that investors are not ignoring private sector debt despite overwhelming demand for sovereign paper,” Mr Kamugisha said.

Other active segments included the 7-year, 10-year, 20-year and 25-year government papers. These dynamics raise critical questions about investor behaviour and the breadth of available options.

Dr Shayo poses a key question: “Why do investors prefer T-bonds over other investment options? Does this behaviour make economic sense, or is it driven by a lack of innovative alternatives for Tanzanian investors—options that could allow them to contribute more strategically to the country’s economic growth?” The dominance of government securities risks crowding out private sector lending, potentially pushing up commercial loan rates and constraining small and medium enterprises (MSMEs), which are central to the country’s economic growth.

The broader economic implications are evident. High capital costs may slow strategic investment and economic diversification, challenging the achievement of Vision 2050 targets.

Conversely, Dr Shayo said, locking in a 14 per cent fixedrate debt protects the government against future interest rate increases, though slower economic growth could increase the overall debt burden. There is also the potential for refinancing at lower rates if macroeconomic conditions improve, which would reduce debt servicing costs over time.

Dr Shayo concludes that “the issuance of the 14 per cent Tbond serves as both an indicator and a consequence of macroeconomic stress. The government benefits from increased revenue; however, this comes at a significant cost,” noting that sustained high interest rates could limit private sector activity and delay long-term development projects. Looking ahead, the path to reducing fiscal pressures involves macroeconomic reforms, enhanced revenue mobilisation and prudent expenditure management.

Future strategies could include diversifying investment options for domestic investors beyond Treasury bonds, creating opportunities for private sector participation while reducing the economy’s reliance on high-yield sovereign debt.