Inflation affects 15-year bond subscription level

THE 15-year Treasury bond has received little activity to see a low subscription level in last Wednesday auction as predicted by debt analysts.

The bond was undersubscribed by 40.22per cent, equal to 54.5bn/- of offered amount of 135.7bn/- but only 39.4bn/-was accepted at the end of the day.

Zan Securities’ Auction Update report issued on Thursday said the auction result analysis indicates that low subscription rates as well as aggressive bidding partly due to investors pricing in rising inflation, and the prospects of a tighter monetary policy to be deployed by the Bank of Tanzania (BoT).

“In light of the tight liquidity, we anticipate sustained low subscription rates for medium-term papers and an aggressive bidding in upcoming auctions more soon on longer term papers,” Zan report showed.

Nevertheless, the report said overall it expects to see a rebalancing for portfolio managers in preference for short duration papers less volatile to rising yields, as they will be keen on avoiding high duration instruments.

Vertex International Securities said in its latest market review report that they anticipated less activity on the Wednesday auction-based low yields.

“We do not expect much activity in 15–year bond auction,” Vertex said.

The analysts polarized the Wednesday 15-year bond auction against the 2-year Treasury bond which was well oversubscribed, highlighting investors’ preference for liquidity offered by short-term papers.

In comparison to the previous 15-year auction in early June, the weighted average yield to maturity has increased by 14 basis points from 11.26 to 11.406 printed in the current auction.

“We project yields at the belly of the curve will edge upwards as investors price in the auction result, while yields at the longer end of the yield curve will remain relatively steady,” Zan report said.

The National Bureau of Statistics (NBS) said inflation increased to 4.5 per cent in July from 4.4 per cent recorded in June.

According to some debt analysts, amidst rising global and local inflation, investors are being pushed to seek better real returns to compensate for inflation risk, which has resulted in an exodus to the equity market at the expense of the debt market.