Analysts: BoT to flatten bonds curve

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DEBT analysts are of the view that the Central Bank is out to flatten the treasury bond yields curve if the new calendar has anything to go by.

The analysts said the government bond yields started to bubble last year and in 2023/24 calendar the central bank reduced some issuance frequencies while omitting on the book the 7-year, termed as an underperformer.

“In general the new issuance calendar aims to slow down the rapid increase in yields,” said the CEO of Zan Securities, Raphael Masumbuko.

The CEO of the largest brokerage firm in the country said this is achieved by distributing the issuances more evenly across medium-term papers, in order to reduce focus on the long-term end.

“As a result medium-term, such as the 5-year and 10-year bonds are likely to attract higher subscription rates in auctions, which has not been the case in the past,” he said.

Additionally, the poorly performing 7-year treasury bond has been removed from the issuance calendar due to its consistently low subscription rates.

Alpha Capital Head of Research and Analytics Imani Muhingo said the yield curve is already elevating since mid-last year as the Monetary Policy Committee (MPC) advises for less accommodative measures.

“One possible consequence of shifting the weight to the medium-term notes is the flattening of the yield curve,” Mr Muhingo said.

Despite substantial oversubscriptions, the frequency of the 20 years and 25 years auctions played a role in raising their yields in the secondary market due to increased supply of the tenors and an upward trend on the yield set by the auctioneer—the central bank.

“Lowering the frequency of auctions of the long-term tenors shall induce scarcity of the notes hence investors’ willingness to purchase the securities at relatively higher prices,” he said.

The effect of high bond prices affects the rising pace of yields of long-term bonds, meaning that even if the yields shall maintain an upward trajectory, the pace shall be lower compared to recent months.

On the other hand, Mr Muhingo said, the increased supply of the medium-term notes shall most likely weigh on their prices and consequently raise yields at a faster pace compared to recent months.

“The central bank is still the most significant trendsetter in regard to the direction of treasury yields as prices in the secondary market are highly determined by the direction of bond prices in auctions,” he said adding “We believe bond prices shall keep dropping, at least in the near future.”

According to the monetary policy statement, the central bank shall maintain a less accommodative stance in the next six months in order to limit liquidity injections, especially with the credit growth to the private sector standing twice the target for 2022/23.

In addition, Orbit Securities said in their weekly market synopsis that the new calendar “unveils some noteworthy changes”.

“Currently, government bond yields have been rising as investors demand a higher premium for these securities,” Orbit said.

Analysts said probably the most surprising move was to lower the 20 years and 25 years auctions from frequencies of six and seven in the previous calendar respectively, to the current annual frequency of three for each.

“The move somewhat contradicts the government’s strategy of lengthening the debt maturity profile,” Mr Muhingo said.

Nevertheless, the weight has been transferred from the long-term tenors to the medium-term tenors, with the highest frequency weighed on the 10 years tenor.

The 10 years bond shall be auctioned six times in the 2023/24 fiscal year, followed by the 2-year, 5-year and 15-year tenors which shall all be auctioned five times each.

During the just-ended fiscal year, the 2-year and 10-year bonds were auctioned four times and the 5-year auctioned three times, similar to the year ahead the 15-year five times.

 

 

 

 

 

Monetary stance drops 25 years bond prices to historical low

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The prices of a 25-year of government bond dropped to an all-time low as the central bank continue to implement a less monetary stance.

The minimum successful prices for longest tenure treasury security floored to 90/03 from 93/53 while weighted average yields went up by 2.7 per cent from 13.23per cent to 13.59per cent.

Alpha Capital Head of Research and Analytics Imani Muhingo told Business Standard that the dropping of prices in the 25 years auction mid-last week was consistent with the current monetary policy.

“The [bond] prices have never been this low,” Mr Muhingo said “but the yields have been at this level before, in late 2021 and early 2022”.

The expectations were the prices to continue declining in line with what has been throughout last year, and in tandem with the monetary policy’s recommendation for less accommodative measures.

“Moreover,” Mr Muhingo said, “the latest monetary policy statement further indicated maintenance of less accommodative measures in the next six months”.

Mid last week, the Bank of Tanzania (BoT) was in the market and sought to raise 180bn/- from the public through the 25-year Treasury bond at a 12.56 per cent coupon rate annually.

However, the auction was subscribed by 185.71per cent and a total of 334.27bn/- worth of bids were received. The central bank accepted 276.79bn/- leaving the rest at the table.

Vertex International Securities, Advisory and Capital Markets Manager, Ahmed Nganya, said one thing to note this bond still attracts high investors’ interest as the subscription level increased by nearly three folds, showing investors’ confidence in the long-term securities.

“We think investors’ appetite is still somewhat balanced between equities and fixed income, especially long maturities,” Mr Nganya said:

“This gives us the confidence of satisfactory market liquidity going forward, albeit eschewed to a small securities segment.”

Zan Securities Advisory and Research Manager Isaac Lubeja said all the 25-year bond auctions in 2022/2023 have been oversubscribed indicating investors’ preference for this maturity.

“Yields have been steadily trending upward underscoring less accommodation by the central bank to keep inflation within the target range,” Mr Lubeja said.

The monetary stance has been adopted by the central bank in different periods against the backdrop of rising inflationary pressures.

The measures paid off as the inflation rate dropped from the peak at 4.9per cent last October to 4.0 per cent recorded in May.

Late last week, the BoT released the Treasury bonds issuance calendar for 2023/24, and there are some substantial changes in the auction frequencies of various tenors.

Mr Muhingo said the central bank omitted the 7-year tenor in the calendar while raising frequencies of short-term tenors including Treasury bills, and reducing the frequency of long-term tenors.

“Probably the most surprising move was to lower the 20 years and 25 years auctions from frequencies of six and seven in the previous calendar respectively, to the current annual frequency of three for each.

“The move somewhat contradicts with the government’s strategy of lengthening the debt maturity profile,” Mr Muhingo said, “The weight has been transferred from the long-term tenors to the medium-term tenors, with the highest frequency weighed on the 10 years tenor”.

The 10 years bond will be auctioned six times in the 2023/24 fiscal year, followed by the 2-year, 5-year, and 15-year tenors which shall all be auctioned five times each.

During the just-ended fiscal year, the 2-year and 10-year bonds were auctioned four times and the 5-year was auctioned three times, while similar to the 15 years was auctioned five times.

“One possible consequence of shifting the weight to the medium-term notes is the flattening of the yield curve,” Mr Muhingo said.

The yield curve is already elevating since mid-year 2022 as the Monetary Policy Committee (MPC) advises for less accommodative measures.

Despite substantial oversubscriptions, the frequency of the 20 years and 25 years auctions played a role in raising their yields in the secondary market due to increased supply of the tenors, and an upward trend on the yield set by the auctioneer, the central bank.