THE Bank of Tanzania (BoT) on Wednesday auctioned a 25- year Treasury bond offering 133.45bn/-, the auction was oversubscribed by 503bn/-, equals to 376 per cent, which was met with robust investor demand.
This was the third auction of the 25-year bond since its issuance April this year, whereby the total subscription received from investors for the bonds was 636bn/-, the most tendered in a single auction, oversubscribing by almost five-times.
The auction result showed that out of 1427 total bids, 384 were successful (26.9 per cent) at weighted price of 102/82.
Despite the high bids, the Bank of Tanzania rejected bids which they deemed aggressive, taking up only 182bn/-, ultimately reducing borrowing cost, the weighted average yield to maturity recorded was 15.48 per cent lower than the 20-year Treasury bond coupon paying 15.49 per cent, Auction subscription trend Oversubscription of the 25-year Treasury bond comes with no surprise, auctions for the long term treasury bonds (20 and 25) have been oversubscribing since their respective introductions in the financial markets prompted by their attractive coupons and subsequent liquidity in the secondary markets which makes it attractive for investors, example the 20-year bond accounted for 46 per cent of trades in the secondary market in the month of September.
However, investor flight towards fixed income securities comes with peril to the economy, as these crowds out much needed funds for the private sector, the reason is because a large percentage of institutional investors buying bonds are commercial banks using excess liquidity which could potentially be lent out to the private sector subsequently lowering lending rates.
Nevertheless, the Bank of Tanzania manually performs the liquidity reallocation process through monetary policies. This is well illustrated in figures as only a fraction of tendered bids are successful, consequentially lowering yields forcing banks to channel the excess liquidity back to the economy.
Future of bond prices Bonds prices have changed because investors have also changed; three years ago, a lot of effort was needed to entice investors to buy treasury bonds, which had not fared well compared to the stock market, whereby stocks had high returns.
The weighted average price of the 20-year Treasury bond in its first auction was 87/90, the shift in tide is visible as prices began trading in premium within three years.
Primary and secondary market yields on similar or identical instruments are highly correlated; high prices in the primary market will subsequently affect prices in the secondary market.
Outlook So far this year, fixed income returns have been modest, yields have fallen to historical lows to reflect the inverse relation with prices although there have been pockets of strength as investors search for yield.
We believe the outlook for economic growth in the quarter of the year is strong and expect intermediate- and long-term Treasury rates to move modestly higher.
Previous Auctions In the second auction early August, the 25-year Treasury paper attracted 585.58bn/- bids while the central bank wanted to raise 133bn/- at a fixed rate of 15.95 % per year.
The auction result offered a glimpse of the monetary direction that the Bank of Tanzania was taking.
The minimum successful price then increased to 100/1035 from the previous 95 as the auction oversubscribed by 340per cent.
In July the Bank of Tanzania issued policy measures to promote credit to private sector and lower interest rates, to kick start the capital reallocation excess liquidity tendered in auctions will be negated by means of increasing the minimum successful price.
The trend thus might explain why only 123bn/- was taken in the second auction despite public to tender 585bn/-.
The high appetite for long tenured instruments will continue to characterise all forthcoming 20 year and 25 year Treasury bond auctions to oversubscription.
However, with the monetary policy measures in place by the Bank of Tanzania, yields are going to fall by means of encouraging more liquidity towards the private sector. Furthermore, increased liquidity in the market can be seen as an advantage as it helps the government to borrow cheaply.
● Zan Securities 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 mainland