Government-guaranteed Treasury bonds are increasingly the preferred asset in Tanzania's main stockmarket in the wake of the coronavirus pandemic as more investors move away from stocks to the more risk-free option.

Treasury bonds traded at the Dar es Salaam Stock Exchange (DSE) were over four times higher in value than total shares traded in over-the-counter deals involving listed entities at the bourse by mid-2021, with the Bank of Tanzania (BoT) attributing this to an increase in perceived equity risks all-around due to the global and domestic economic slowdown caused by Covid-19.

The value of Treasury bonds traded by BoT on behalf of the government at the bourse rose 26.6 percent to just over $962.3 million year-on-year between June 2020 and June 2021, while total turnover of equity market shares traded fell 22.6 percent from $292 million to $225.87 million in the same period. Treasury bonds traded in 2019/20 amounted to $762,895.

"The increase was mainly attributed to the shift in investors’ appetite for risk-free investments due to the impact of the Covid-19 pandemic and ongoing efforts by stakeholders to develop the bond market," BoT said in its annual report for 2020/2021 published on December 31.

The 20-year government bond was the most traded, accounting for 42.7 percent of total transactions, followed by the 10-year bond (22.6 percent), 15-year bond (21.6 percent), seven-year bond (9.5 percent) and 5-year bond (3.1 percent).

The two-year bond and the central bank's own 25-year bond contributed 0.6 percent of total transactions amid rising speculation that the 25-year bond, which was introduced in April last year with higher yields to complement government efforts, will gain more popularity from this year.

Trade of corporate bonds more than tripled in value from $246,597 in 2019/2020 to $741,222 in 2020/2021 thanks to the high appetite by retail investors towards bonds issued by the NMB and Exim (Tanzania) banks.

In May 2020, as part of Covid-19 impact mitigation, the BoT reduced haircuts on government securities, from 40 to 20 percent for treasury bonds and 10 to 5 percent for treasury bills, to boost the ability of commercial banks to borrow from the central bank with less collateral and subsequently to reduce loan interest rates to individual borrowers.

A haircut is the lower-than-market-value placed on an asset when it is being used as collateral for a loan.

But according to financial sector observers, the banks have used the extra liquidity to buy more government securities rather than issue more loans to individuals and private businesses.

Expanding credit

Charles Kimei, the Vunjo legislator who previously headed CRDB Bank, pointed out in parliament last year that although the banks may be right to do this as a precautionary measure against various pandemic-induced market risks, it compromised the central bank's attempts to expand credit and ease lending conditions to the private sector.

BoT said in its report that treasury bills and bonds worth $2.12 million were issued in 2020/2021 to finance government budgetary operations, which were characterised by lower-than-projected revenue collections, thereby widening the fiscal deficit.

Out of the borrowed amount, $1.3 million was for rolling over maturing obligations and $819,245 for budget financing.

Both bonds and bills were over-subscribed, attracting bids worth over $2.08 billion.

"Consistent with sizable demand in the money market, overall treasury bills yields decreased to an average of 4.75 percent compared with 5.85 percent in 2019/2020," BoT said.

At least 64.5 percent were in the form of treasury bonds of which $1.41 billion was accepted in total bids value.

The central bank accepted bids worth $797,572 in total while treasury bills worth $1.04 million matured in 2021 compared with Tsh3.45 billion ($1.49 million) in the preceding year.