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Why yields on T-bills drop

Why yields on T-bills drop

Last Wednesday 14th July, the central bank offered 72.7bn/- for the 364-day Treasury bill while 3.0bn/- was offered for the 182-day maturity.

It also offered 1.0bn/- and 1.7bn/- for 35-day and 91-day maturities respectively. Yields of the 182 and 364 fell by -8 and -74 basis points respectively in contrast to the last auction conducted in June.

What explains these results?

Yields on short term government securities (Treasury bills)fell slightly for a second straight auction as a liquid market pushed price high as investors strive to lend to the government.

Yields for both the 182 and 364 day Treasurybill have declined by -8 and -74 basis points as shown in the chart. Treasury bills are sold at a discount the difference between the auction sales price and the value of the T-bill at maturity represents the income from the T-bill.

Falling in yields are attributed by many factors, in particular increase demand for risk-free securities in general caused by excess liquidity in the market—For example, a "flight to safety" caused by concerns about default or liquidity risk in otherfinancial markets may cause investors to shift to T-bills toavoid risk.

Average yields for treasury bills have been declining since April signaling an increased liquidity driving demand for thepaper high. Some might cite that the central bank may perhaps also be trying to stabilize interest rates by rejecting aggressive bids that are priced above the market for Treasury bills noticeable in the auction result of 364 day paper whereby out of 49 bids only 7 where successful.

Declining of yields lowers cost of borrowing to the government moreover being beneficial as cost of domestic borrowing is reduced.

Why are the yields movements on treasury bills important?

The yield on Treasury bills is generally viewed as the representative money market rate. For this reason Treasury bill interest rates are typically used as the index rate for variable rate financial contracts. In particular, the spread between private money rates and Treasury bill interest rates is used as a measure of the default risk premium on private securities.

Enhancement of market liquidity

Intervention measures such as keeping Treasury bill yields low can spur economic development as banks will look foravenues to generate income such as increasing in private sector lending which according to the Bank of Tanzania monthly economic review for June the annual growth of credit to the private sector was around 4.7 percent in May 2021 and 4.8 percent in the preceding month, up from 2.3 percent in March 2021.

Outlook

A marginal decline in Treasury bill yields, coupled with creeping inflation as the Consumer price index rose from 3.3 per cent in May to 3.6 per cent in June means there’s no prospect of increased real returns on the paper in the foreseeable future. Excess liquidityin the market will possibly be channeled into longtenure Government securities which have higher yields than the money market instruments.

Weekly Market Wrap-Ups

Equities

Last week’s DSE equity market bounced back with animpressive turnover of 5.64bn/-. A pre-arrangedblock trade of the TBL counter that traded a block of

1,204,726 shares led this bullish performance.

TBL counter also dominated this week’s market share at88.66 percent, followed by CRDB and NICOL at 5.89 and 3.23 percent, respectively.

Price movement was recorded on three domestic listed companies. The self-listed DSE appreciated by 8.33 per cent to close the week at 1,300/- per share.

Others were NICO that gained 2.22 percent to close at 230/- per share and CRDB up by 2.04 percent to close at 250/-per share.

Total Market capitalization slightly dropped by 0.11 percent close at 16.673tri/- and domestic market capitalization went up by 0.17 percent to close at 9.508tri/-.

The key benchmark indices closed as follows; -Tanzania share index (TSI) closed at 3,610.35 points an increase by 0.17 percent.

All Share Index (DSEI) dropped by 0.11 percent toclose at 2,004.91 points

Sector Indices closed as follows; - Industrial and Allied Index (IA) closed at 4,991.55points same as last week.

Bank, Finance and Investment Index closed at2,508.74 points, up by 0.80 percent.Commercial Services Index closed at 2,139.33 points like the week before.

Outlook

Foreigners continue to show an appetite in our equity market, which is a positive sign for our bourse. Their appetite will increase their chances of participation, which will increase the liquidity and make our capital market vibrant for more investors.

  • This analysis was compiled by Zan Securities a capital markets and securities authority licensed dealer and a member of the Dar es Salaam Stock Exchange (DSE) and one of the leading stock market dealers with branches in Zanzibar and Tanzania mainland.
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