What BoT seeks to achieve with reduced T-bond coupon rates

Dar es Salaam. The Bank of Tanzania (BoT) is reducing its coupon rates on Treasury bonds (T-bonds, or Treasury paper).

Apparently, this is in its latest efforts to persuade the commercial banks operating in the country to also reduce their current lending rates, thereby stimulating stock market activities, as well as reducing the government’s costs for domestic borrowing.

Generally, a “coupon rate” is the annual income which a person who has invested in a T-bond can expect to receive for the bond he/she has invested in.

In its latest public notice, BoT has reduced the coupon rate for the two-year T-bond from 7.82 to 7.6 percent, while the five-year bond will attract a fixed coupon rate of 8.6 percent per annum: down from the previous 9.18 percent.

More or less in the same vein, the seven-year T-bond will now carry a fixed coupon rate of 9.48 percent per annum – a drop from 10.08 percent – while the ten-year bond will attract an interest of 10.25 percent per annum, down from 11.44 percent.

BoT’s new coupon rate for the 15-year T-bond is 11.15 percent, down from 13.50 percent, while the 20-year and 25-year bonds will carry fixed coupon rates of 12.1 and 12.56 percent respectively.

Initially, the 20-year T-bond had its coupon rate fixed at 15.49 percent per annum, while the 25-year bond – which was launched in August 2021 – had return rate fixed at 15.95 percent.

“The rates shall be applicable prospectively from 13th April, 2022, and do not affect previously issued T-bonds. The coupons are fixed for the duration of the bond, and shall be paid semiannually,” the BoT says in its public notice which was published last Friday (April 8, 2022).

Analysts say the BoT’s move seeks to set the tone for reductions in commercial banks’ lending rates; reduce the government’s debt servicing burden, and propel activities at the stock market – among other goals.

Vertex International Securities Ltd’ manager for advisory and capital markets, Mr Ahmed Nganya, said the rates had to be reduced because the previous ones had reached unprecedented levels.

He, therefore, hailed the move as a good one, as it sought to align the coupon rates with bond yields.

“For instance,” he said, “a 20-year bond pays an annual interest of 15.49 percent. However, it is bought at yields of around 11.00 percent – meaning that the interest rate is already lowered by price to the yield level”.

He further said that the BoT could also be signaling an interest rate reduction direction, while expecting the commercial banks to follow suit – thereby making borrowing less costly.

According to the Zan Securities Limited chief executive officer, Mr Raphael Masumbuko, the move by the central bank to peg coupon rates on current market yields was an effort to reduce debt servicing cost to the government.

“The logic is that, if the market has the ability to acquire bonds with 15.49 percent coupons – such as the previous 20-year bond at yields – below 12 percent, then the market will also be in a position to acquire bonds issued with similar coupons,” he said.

An independent financial market analyst, Mr Christopher Makombe, termed the decision by the BoT to lower coupon rates as a “step in the right direction – and was long overdue”.

He said that, given the consistent demand for Treasury bonds – and current inflation rate of about four percent – the 15 percent coupon rate was way too high, thereby causing unnecessary borrowing costs to the government.

Mr Makombe also noted that the decision would likely see to the cost of government borrowing going down.

“This saving will help the government in supporting other development expenditure from the savings made on the reduced borrowing costs,” he said.

The decision may also see to investors seeking higher returns in alternative investment avenues – and, thus, raising the level of activities at the Dar es Salaam Stock Exchange (DSE).

“The main impact will be in the overall reduction in the interest rates that are currently charged by the commercial banks on businesses and individuals,” Makombe said.

According to him, the government’s yield curve was being used by banks in “pricing loans to their customers.

“Reducing the coupon rates on new Treasury bond issues will lead to a general fall in the yield curve – and this should mean a huge relief from the persisting outcry by the business community against high interest rates,” he said.

Also, he added, the new rates are in line with the East Africa regional benchmarks for long-term bonds, which is currently at around 12 to 13 percent for a 20-year Treasury paper.