THE 364-day Treasury bill yield has fallen for the 6th consecutive auction. This decrease in the 364-day Treasury bill yield may be seen to have a negative correlation in the stock exchange market as investors steer from low yielding instruments towards equity investments that offer relatively higher returns.
On Wednesday 11th August 2021, 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.
The 364-day bill was sold at a yield of 3.86 per cent, compared to 3.96 per cent at the last auction, falling by 10 basis points while the 91 day bill was sold at a yield of 2.02 per cent compared to 3 per cent at the last auction falling by 98 basis points.
The fall in Treasury bill yields can also be attributed to expansionary monetary policy measures being implemented by the central bank as a vital step towards pandemic relief measures.
What explains these results? Treasury bills are short-term debt instruments with maturities of less than one year issued by the government through the Bank of Tanzania (BoT).
Yields fell slightly for the sixth consecutive auction as a liquid market pushed prices high as investors strive to lend to the government. Falling yields are attributed by many factors, in particular the increase in 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 other financial markets may cause investors to shift to T-bills to avoid risk. On the other hand expansionary policy suppresses treasury yields as the Bank of Tanzania has adopted measures to increase credit to the private sector.
In this sense the cut off yields in treasury auctions will be lowered as a means to divert liquidity towards economic growth.
Relationship between treasury bill yields and the stock market Interest rates are determined by monetary policy of a country according to its economic situation.
Currently the Bank of Tanzania has implemented monetary policy measures to increase money supply in the economy by reducing lending rates with the ultimate aim of promoting economic growth. Changes in interest rates influence the value of a company’s stocks and shares, hence the stock returns.
From the above chart it can be observed that the 364-day treasury bill yield has a negative correlation to the Tanzania share index. The Tanzania share index (TSI) represents domestic listed equities and as yields drop investors move towards equity investments in the stock market, driving prices up.
An expansionary monetary policy creates a more conducive equity investment as borrowing costs are lowered.
High interests rate prevent capital outflows, hinder economic growth and, consequently, hurt the economy as they are among the most important factors affecting directly the growth of an economy. Lower interest rates increase stock prices which in turn reduce the probability of financial distress.
Lower interest rates result from expansionary monetary policy such as the current measures being implemented by the Bank of Tanzania that boost the stock market.
The stock markets constitute the most important institution for massive capital formation geared towards economic development.
Factors such as capital market capitalisation rate, exchange rate, money supply, rate of interest rate charged on financial instruments amongst others exert some impact on the development and growth of the economy.
From the above chart it can be observed that yields of the 364-day treasury bill has fallen from highs of 18.97 per cent recorded during early 2016 to its lowest point at 3.86 per cent recorded in last week’s auction which is just 0.06 per cent above July’s inflation rate of 3.8 per cent. Outlook The low-yield environment will drive investors into the stock market where yields were previously as high as 8.5 per cent for dividend-paying stocks with solid fundamentals.
The Tanzania share index (TSI) is up by 3.5 per cent on a Year To Date basis (YTD) with individual stock prices such as CRDB Bank going up by 33.3 per cent after opening the year at 195/- per share to 260/- and Twiga Cement (TPCC) up by 56 per cent after opening the year at 2,500/- per share to 3,900/-.
Due to the monetary policy which is being implemented by the central bank it will continue to push treasury yields lower, prompting investors to seek other financial markets that offer relatively higher yields.
● The analysis is compiled by Zan Securities 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 modern ICT infrastructure and branch network from Zanzibar and Tanzania mainland.