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Why Treasury bonds are investors potential friends

Why Treasury bonds are investors potential friends

THE bond market is the segment of the capital market in which investment in loans are traded, bought and sold. These loans could be in form of corporate or government loans—corporate bonds and Treasury bonds.

The bond market in Tanzania is primarily dominated by Treasury bonds with corporate bonds only accounting for an average of 0.1 per cent of the monthly total value of bonds traded in the secondary market.

On the other hand the equity market, or the stock market, is a segment of the capital market whereby equity interest in companies are bought and sold in terms of “shares”.

The term includes the Dar es Salaam Stock Exchange (DSE) which was incepted in 1996 with currently 28 companies trading their shares on the exchange. Investments in Treasury bonds are usually deemed risk free due to the fact that the government being the issuer of such securities is considered to be “default proof” for bonds denominated in local currencies, ultimately offering a lower potential return on investment compared to equity investments.

Treasury bond investments by nature fluctuate less in price than stocks. Traditionally retail investors have been anchored towards equity markets with stocks providing relatively higher returns to compensate for the extra risk being taken on by investors.

Compared to debt instruments such as treasury bonds, equity investments offer a double sided return, one in price appreciation and the other in dividend income however due to their risk nature and risks of economic fluctuations upside potential is not guaranteed, as it was the experience during Covid-19 through which economic activities slowed down affecting the profitability of some exchange traded stocks.

Till recently, most equity market investors hardly paid any attention to the bond market. The Tanzania bond market in the recent few years was not vibrant relative to the stock market, with most participation dominated by institutional investors such as commercial banks, insurance companies and pension funds, retail participation in the bond market was microscopic.

All the above has gradually changed over the last two to three years. The introduction of the 20 year Treasury bond in 2018 and the subsequent introduction of the 25 year Treasury bond earlier this year have given investors a yield incentive to pay attention to.

It’s hard to ignore Treasury bonds when the 20 and 25 treasury bonds are offering 15.49 per cent and 15.95 per cent annual interest respectively.

When it was first auctioned in September 2018 the minimum price of the 20 year Treasury bond was 82 meaning an investor could buy a 100m/- face valued 20 year T-bond at a cost of 82m/-, and the total amount tendered by investors in that auction was 61bn/- the results of the recent 20 T-bond in July this year sets a compelling overtone about investors sentiments towards treasury bond securities, the minimum price was recorded at 100.0123 and the total amount tendered was an immense 416bn/-.

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.

What has brought about this change? Dividend yields in the stock exchange for dividend paying stocks have averaged around 7.0 per cent. Example a stock like CRDB has a dividend yield of 8.8 per cent with the current market price of 250/- per share.

A risk free interest rate of 15.95 per cent offered by the 25 year Treasury bond is most likely going to entice risk averse investors to migrate from equity to debt securities.

Outlook

Stock Market Outlook: DSE has had a slight bullish streak gaining 5.1 points (0.27 per cent) on a week to week basis spurred by a buying spree as investors migrate from low performing stocks to companies that have recently issued exceptional Quarter Three earnings results such as NMB and CRDB.

Moreover strengthening economic fundamentals drive performance of listed firms on the Dar es Salaam Stock Exchange up against the backdrop of Tanzania’s improving economic fundamentals; lower inflation, the relative stability of the shilling and the rebound in economic growth spurred on by consumer demand, boosted sales growth in listed companies.

Fixed Income Market Review: The fixed income market continues to be vibrant and we expect it to continue that way as we approach the end of the year, with the 15 year treasury bond over subscribing for the first time this year shows a sign of investors competing for fixed income yields as the central bank continues to employ accommodative monetary policy to increase money supply and reduce lending rates.

Talks about a potential haircut in Treasury bond coupons will put pressure on auctions as investors want to lock themselves in against a backdrop of a potential reduction in coupons.

Mr Masumbuko is Zan Securities’ Chief Executive Officer. Zan is a capital markets and securities authority licensed dealer and a member of the Dar es Salaam Stock Exchange (DSE).

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Author: RAPHAEL MASUMBUKO

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