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Why 20-year treasury bond was heavily oversubscribed

Why 20-year treasury bond was heavily oversubscribed

ON what was the first auction of the 2021/2022 fiscal year, the central bank of Tanzania (BOT) on 6th July 2021 auctioned a 20-year treasury bond entailing to raise 139.5bn/- at a fixed rate of 15.49 per cent per year.

The trend of investors’ appetite for the longer tenured instruments continued with an over subscription by 198 per cent. The Treasury bonds market held its breath on 6th July 2021 as traders anticipated the treasury bond primary market auction results.

The biggest talk however was the minimum successful price set by the central bank at Tshs 100.0123 the highest in all preceding auctions.

Weighted average coupon yield across the benchmark curve remained mostly unchanged from the previous 20 year Treasury bond auction expanding slightly to Tshs 15.4255 per cent from the previous Tshs 15.4182 per cent as a result of decreased weighted average price slightly to Tshs 100.4184 from Tshs 100.4654.

What explains these results? When investors are more risk averse, they are more interested in buying treasury bonds due to their relatively risk-free nature, thus pushing up the prices and causing the yields to decline.

The 20-year treasury bond weighted average prices have been increasing sharply from Tshs 87.94 on its debut issuance to Tshs 100.4184 during this auction within a period of three years attributed largely by increased participation by both retail and institutional investors, and overall perception of the economy.

The central bank debt management operations have managed to successfully bring down the yields in the market by setting the minimum successful price at the highest it has ever been to Tsh 100.0123. Bond prices and yields have an inverse relationship as the higher the price of a bond the lower its yield falls.

Lower yields are beneficial as they reduce the government’s borrowing cost. This will help to complete the enhanced borrowing programme for FY21/22 to fund infrastructure and development projects.

The minimum floor price of Tshs 100.0123 indicates that all successful bids have been purchased above their respective par value. The Government would be pleased with the outcome since they were able to lower their borrowing costs while still experiencing oversubscription.

The 20-year Treasury bond has been heavily characterized by the over- subscription of auctions. All auctions of the 20- year Treasury bond since its introduction in September 2018 have been oversubscribed meaning investors were tendering more than the offered amount by the central bank.

Increase in demand for the 20 year Treasury bond subsequently raises its price, as seen in the above chart prices have been increasing steeply in one year period.

Increase in the lowest bid from 80 to 95 is an indication that investors are more stringent on their bids raising their offers to increase the likelihood of being accepted.

The weekly equity market This week’s DSE equity market capitalization increased by Tshs 291.60 million, appreciating by 1.78 percent. Two counters that dominated the market share this week, Simba cement at 48.29 percent and CRDB at 40.92 percent attributed this.

Total turnover for this week capped at Tshs 231.22 million. Price movement was recorded on one domestic listed company. The self-listed DSE closed off the week at Tshs 1,200, after dropping by 7.69 percent.

Total Market capitalization is up by 1.78 percent close at Tshs 16,690.89 billion and domestic market capitalization dropped by 0.16 percent to close at Tshs 9,492.40 billion.

The key benchmark indices closed as follows: Tanzania share index (TSI) closed at 3,604.35 points a decrease by 0.16 percent. All Share Index (DSEI) gained by 1.78 percent to close at 2,007.02 points.

Sector Indices closed as follows: Industrial & Allied Index (IA) closed at 4,991.55 points same as last week. Bank, Finance and Investment Index closed at 2,488.91 points, down by 0.02 percent.

Commercial Services Index closed at 2,139.33 points like the week before. Equity Market Outlook High appetite for long tenured instruments will continue to characterize all forthcoming 20 year treasury bond auctions to oversubscription.

The institutional investors such as commercial banks, pension funds, insurance companies and some microfinance institutions will dominate upcoming auctions, with higher coupon rate, stable exchange and inflation rates among the major factors that make the 20 year treasury bonds to be attractive to investors.

Furthermore, increased liquidity in the market can be seen as an advantage as it helps the government to mobilize more funds to finance its budget operations effectively.

  • This update was prepared by Zan Securities Limited. The firm is a capital markets and securities authority licensed dealer and a member of the Dar es Salaam Stock Exchange (DSE). It is currently one of the leading stock market dealers in terms modern ICT infrastructure and branch network from Zanzibar and Tanzania main land.
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