Tanzania: BoT Inverted Rates Lower Bond Prices

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The price of 20-year Treasury bills has fallen considerably and is expected to continue to fall, thanks to the adjustment of coupon rates made by the central bank.

Debt market analysts expected lower prices, shifts in yields to maturity and oversubscription after the Bank of Tanzania (BoT) revised coupon rates last week.

The bond was almost oversubscribed by 35% at 175 billion/- against 129.82 billion/- on the table. The oversubscription caused the weighted average price to fall from 128/8809 to 103/7905.

Vertex International Securities Advisory and Capital Markets Manager Ahmed Nganya said Wednesday’s auction results came out as expected – an oversubscription with little change in yields.

“We believe the rate adjustment will have a significant effect on the markets as prices are expected to decline and yields rise, albeit gradually. ‘future,’ Mr Nganya told ‘Daily News’ on Thursday.

The central bank adjustment reduced the 20-year coupon rate to 12.1% from 15.95%. Alpha Capital’s head of financial research and analysis, Imani Muhingo, also said there was not much difference from the Treasury bond auction of the past 20 years. “…The huge difference is that the prices match the discounted coupons,” Mr. Muhingo said.

He further said that the revision will stabilize bond prices and cement the lower yields accepted by the market now, which is positive for injecting liquidity into the economy.

Last week, the BoT reversed Treasury bill coupon rates in what was called to realign the instruments with the current debt market reality. Rates, for example, the coupon rate for 25-year bonds, a cherished instrument for investors, reversed to 12.56% from 15.95% and 20-year to 12.10% from 15.49%.

“Investors should accordingly lower bid prices to achieve yields as similar as they are now. This should stabilize bond prices and cement the lower yields accepted by the market now, which is positive for the injection of liquidity into economy,” Muhingo said.

One of the medium to long term effects should be increased private sector credit growth, a trade-off from the current significant government credit growth.

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