High and Volatile Treasury Yields in Tanzania: The Role of Strategic Bidding and Auction Microstructure

Abstract

The observed increase in the level and volatility of Tanzania's Treasury yields in recent years against an otherwise benign macroeconomic backdrop presented a puzzle for policymakers, while raising concerns about the fiscal burden of rising debt interest payments and diversion of bank credit away from the private sector. Using evidence from bid-level data, and supported by a simple theorising of bidder incentives under unorthodox issuance practices, this paper traces the recent volatility in yields to the emergence of a sharp segmentation of the T-bill market between sophisticated financial market players (foreign-controlled banks) and a less-experienced group of investors (domestic pension funds and small banks). An important policy recommendation that emerges is that public debt managers should avoid micro-managing Treasury bill auctions by issuing amounts in excess of those offered or by dipping into oversubscribed segments of the yield curve, as such practices seriously disadvantage the less-sophisticated (but more competitive) investors vis-à-vis the more sophisticated players. Copyright (c) 2009 The Authors. Journal compilation (c) 2009 Economic Society of South Africa.

Competitive Conditions in the Tanzanian Commercial Banking Industry

“…The insignificance of the risk measure could also project the importance of risk free Treasury securities in Tanzanian banks’ revenue generation process. According to Abbas and Sobolev (2008), the dominant foreign‐owned banks in Tanzania hold substantial amounts of Treasury debt instruments which also account for a sizeable amount of their income. This is also true of many other developing countries in SSA where traditional financial intermediation is subordinated to investment in Treasury bills because of assured return at near zero risk.…”

Fiscal Policy and the Current Account

“…The counter-intuitive result is driven mainly by fiscal contractions, where higher financial openness is associated with weaker current account improvements. A plausible explanation could be the role of market power in emerging and lowincome country domestic debt markets which could cause interest rates to rise more sharply in response to increased government bond issuance (fiscal expansions) than to fall in response to lower government borrowing (fiscal contractions) (see Abbas and Sobolev, 2009). Insofar as financial openness augments this asymmetric interest-rate responsiveness, the size of fiscal expansion-linked currency appreciations would tend to be larger and the size of fiscal contraction-linked currency depreciations smaller.…”

Untitled

“…The structure of the market for sovereign debt and its functioning play an important effect on bond yields. In their study, Abbas and Sobolev (2009) found that segmentation of the T-bill market between sophisticated financial market players (foreign-controlled banks) and a less-experienced group of investors (domestic pension funds and small banks) explains the volatility of T-bill yields in Tanzania. Additionally, for a panel of 6 West European countries, Bias et al (2004) have shown that irregularly issuing securities raises the yields government must pay.…”