THE impact of the double-digit inflation rate has started to send ripple effects in the economy after the Bank of Tanzania (BoT) cancelled for the second time the selling of Treasury Bonds (TB) because bidders demanded "very high yield rates." While the central bank called off the long term auction, the seven days repurchasing agreement (Repo) also fumbled miserably last week after fetching only 5bn/- instead of the intended 20bn/- despite its five per cent interest rate tag. BoT decided to cancel the auction after disagreement on yield rates with bidders, mostly commercial banks that control up to 60 per cent of the debt market. They had wanted to factor in inflation risks to safeguard their investments. By definition, bonds are among the safest investments in the world. As long as one holds the bond until maturity and the government does not collapse, nothing can go wrong - unless inflation climbs. Thus makes them particularly vulnerable when inflation rises. Tanzania Securities Chief Executive Officer Mr Moremi Marwa said the risk rises when the investment failed to keep up with the inflation rate as the cash put in the bond declines in value. "This is the second time in about three months for BoT to cancel the auction - investors feel that they will get the principal back when the bond matures, but it will be worthless, as inflation erodes the returns," Mr Marwa said. Inflation climbed to 14.1 per cent in August and is expected to increase further, thus putting at risk investors' returns, because bond prices have an opposite relationship to interest rates. Relevant Links East Africa Tanzania Business In the last Wednesday auction, BoT offered an interest rate of 12 per cent for the five-year bond. But investors wanted high returns to hedge their investments from high inflation rate, which BoT dis not accept. TBs have for months shown outstanding performance in the financial markets and persistently recording oversubscription but are no longer glittering as they used to be. According to the Bank of Tanzania (BoT) Auction Summary for a five-year bond, the government offered 40bn/- but only 29.5bn/- was tendered, signifying under subscription of almost 25 per cent. The Bank's auction summary revealed that the number of successful bids were 25 against a total of 36 received. Only 9.5bn/- was successful against 40bn/- total sum offered.