Why T-bonds attract more investors despite other options

WHY do investors prefer T-Bonds over other investment options? Does this behaviour make economic sense, or is it driven by a lack of innovative alternatives for Tanzanian investors, options that could allow them to contribute more strategically to the country’s economic growth?

As an economic and investment analyst, I was deeply moved by the results of the 9 April 2025 auction, which aimed to raise 244.008bn/-. I was particularly struck by the number of applicants, the successful bidders and the overall outcome of the auction.

That reflection also made me consider the progress of the auctions and how the offered interest rates influence broader economic outcomes, such as stimulating growth and expanding national wealth. It also raised questions: Are there alternative ways to attract Tanzanian investment, given the challenges others have faced? And how much remains available for me, does it represent a significant opportunity?

To ensure we are on the same page before exploring what I believe investors need to understand, let us revisit the outcome of Auction Number 1, held on 3 September 2025.

The results of last Thursday’s auction, which offered 14.00 per cent for the 20-year Treasury Bond No 678, Issue 272, show the limited development of alternative investment options for investors beyond Tbonds. If many investors rush into T-bonds, an examination of the unsuccessful bids shows that a large amount of capital is seeking investment opportunities.

However, either the interest rates offered by banks on fixed deposits are unattractive, or structuring loans based on coupon yields points to a broader challenge in creating investments that could have a stronger impact on the economy. These results also raise a fundamental question about the effects of such investments.

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My third observation is that there are times when one should avoid being overly inventive and not present T-bonds as the only or best investment option for institutions and individuals. Finally, who bears the responsibility for ensuring the house is in order on this issue and what needs to be done, will be the subject of my next discussion.

To put it into perspective, regarding the auction held last Wednesday, the following are the economic and investment outcomes.

The auction result signifies a substantial interest burden in terms of budgetary and cash flow implications when considering the economic and investment impacts. I believe that at 14 per cent, paying down this debt over 20 years will greatly deplete Tanzania’s budget, potentially reducing public investments or requiring stricter fiscal measures. Similarly, the 20-year maturity will help match funds with long-term capital projects, allowing for smoother amortisation schedules.

The closer examination of the economic and investment implications, especially concerning benchmark market interest rates, reveals risks and inflation. The borrowing costs in the corporate and financial sectors will be affected by a 14 per cent fixed rate, which suggests high inflation expectations or perceived sovereign risk.

This yield will now serve as a benchmark for other debt instruments, such as corporate bonds and project finance, from a banking lending perspective, which could have significant economic consequences.

Undoubtedly, this will appeal to fixed-income investors due to the economic and investment implications, as well as how the conclusion might influence investor interest and lay the groundwork for fiscal strategy.

The high coupon could attract domestic investors seeking stable returns in a volatile market, including banks, insurance companies and pension funds. However, the significant interest burden raises concerns about budgetary sustainability, particularly if income growth remains slow.

A crowding-out effect with potentially significant economic consequences is evident when examining monetary and inflation dynamics. Many may not be aware of this, so policymakers must be creative in offering alternative investment options with attractive government yields.

Otherwise, funds may be diverted from private sector lending, pushing up commercial loan rates and affecting MSMEs. In today’s economic climate, MSMEs form the backbone of the economy. They not only create jobs but also contribute taxes that enable the government to provide services that the private sector often avoids.

While tighter monetary conditions could serve as an exit strategy for the BoT, the central bank may need to maintain higher policy rates to support high yields, potentially restricting overall economic growth.

It’s interesting to note that these findings prompt analysts like me to think more deeply, especially regarding the national debt sustainability profile, considering a longer-term commitment. Locking in a 14 per cent fixed-rate debt now protects against future rate increases; however, if economic growth slows, the debt burden will increase.

The possibility of an improving yield trend suggests that there may be scope for refinancing to lower servicing costs if the government can borrow at lower rates in the future. Demand signals resilience when considering these findings alongside investor and market confidence.

Although sustainability depends on execution, a strong subscription (as reflected by issuance levels) indicates some investor confidence in Tanzania’s ability to meet its financial and monetary commitments. In my view, the government’s ability to manage revenue growth and macroeconomic stability will influence my level of confidence in the future.

My final point on these auction results is that the successful issuance at 14 per cent indicates prevailing fiscal and inflationary pressures.

The extended duration offers a stable funding environment; however, after subjecting these results and reality on the ground and looking at the country’s economy, looking at a one trillion economy as outlined in the Dira 2050, it highlights the need to achieve economic returns that exceed 14 per cent, whether through growth initiatives or cost reduction strategies.

A 14 per cent Treasury bond issuance rate clearly conveys essential insights into current economic conditions, particularly regarding inflation expectations, fiscal limitations and the overall stance of monetary policy.

The effect on strategic investment, business competitiveness and private sector access to credit in Tanzania will depend on how the trend is interpreted. In summary, as an experienced economist with extensive knowledge of investment matters locally, regionally and internationally, the issuance of the 14 per cent T-bond serves as both an indicator and a consequence of macroeconomic stress.

The government benefits from increased revenue; however, this comes at a significant cost. High interest rates are likely to reduce borrowing in the private sector, potentially delaying strategic and long-term investment projects. Persistently high capital costs could slow economic diversification and hinder the achievement of Vision 2050 targets.

For Tanzania to achieve inclusive, innovation-driven growth especially as the nation votes in a new government on 29 October 2025, it is crucial for the incoming administration to strategically consider ways to sustain macroeconomic stability, strengthen fiscal capacity and improve access to affordable financing for the private sector.

Looking ahead, implementing macroeconomic reforms, enhancing revenue mobilisation and practising prudent expenditure could allow the government to refinance at lower costs, easing the debt burden. In my next article, I will outline what needs to be done, along with options and recommendations I plan to present to the Bank of Tanzania, focusing on innovative investment choices for Tanzanian investors beyond T-bonds.