Falling yields boost equity valuation
DAR ES SALAAM: FALLING yields on short-term bonds are driving a reassessment of equity values as investors respond to clear signals from the central bank— Bank of Tanzania (BoT).
This shift lowers discount rates, increasing the appeal of stocks with strong growth potential compared to fixed income investments. The trend aligns with the BoT’s policy rate cut to 5.75 per cent earlier this month and its directive to anchor 7-day interbank rates within a 3.75 per cent to 7.75 per cent corridor.
Alpha Capital Head of Business Development and Customer Service Geofrey Kamugisha said the interbank market has complied, with average rates softening to remain well within this range, despite increased transaction volumes.
“The key insight here is alignment, the market appears to be buying into the central bank’s signalling,” said Mr Kamugisha.
“As such, continued downward pressure on short-term yields is likely to persist, and as yields continue to drop, discount rates decline, the equity landscape is being reshaped, equity valuations are naturally being re-rated upward,” said Mr Kamugisha.
The lower rates reduce the present value hurdle for future cash flows, making risky assets, particularly equities with durable growth potential, more attractive relative to their fixed income counterparts, said Mr Kamugisha.
“In this environment, capital is likely to flow more aggressively toward equities, not out of speculation, but as a rational response to declining opportunity cost,” said Mr Kamugisha.
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Valuation expansion driven by falling discount rates can amplify returns, especially in sectors or names that exhibit pricing power, strong fundamentals, and forward-looking earnings resilience, said Mr Kamugisha.
“In short, the alignment between policy, yields, and investor behavior is creating a tailwind for equities, one that shouldn’t be ignored,” said Mr Kamugisha.
Zan Securities Advisory and Research Manager Isaac Lubeja said on the macroeconomic front, the BoT’s recent decision to lower the benchmark rate is expected to improve credit uptake and stimulate economic activity.
“Slightly reduced institutional interest in longterm government bonds, attributed by lower rates,” said Mr Lubeja.
Additionally, the move may also contribute to a gradual shift of investor preference toward risk assets such as equities and mutual funds, said Mr Lubeja.
On the equity side, retail dominance in select counters is growing, but liquidity remains heavily concentrated, said Mr Lubeja. On the fixed income side, monetary policy clarity is translating into tangible yield compression across both short- and long-dated papers, said Mr Lubeja.
Fixed income investors may benefit from short-term yield compression and rising bond prices. Equity investors can tap into stronger consumption, better bank and telecom earnings, and solid macro fundamentals, said Mr Lubeja.
