Government, through Bank of Uganda, is mobilising money from the domestic debt market to support budget activities. PHOTO / FILE
Government is diving into the bond market early, seeking to raise Shs990b in its first auction of 2025.
Bank of Uganda is today expected to oversee the sale of three bond tenors of two, five, and 15 years.
The offerings include Shs230b ($62.3m) for the two-year bond with a 13.5 percent interest, Shs330b ($89.4m) for the five-year bond (14.25 percent), and Shs430b ($116.5m) for the 15-year bond (15.8 percent).
The auction opens government’s activities in what could be a critical year for the domestic debt market.
In the previous auction (October 2024), interest for the two-year bond was relatively higher at 15.75 percent, while the five and 15-year bonds carried interest of 16 percent and 16.75 percent, respectively.
Bank of Uganda accepted 73.21 percent of the then Shs1.87 trillion ($506.7m) tendered.
Ms Cindy Hannah Kukunda, a chartered financial analyst at ICEA Lion, said this creates an attractive opportunity for investors since higher interest rates present an opportunity to buy bonds at a discount given that they will relatively be cheaper to buy.
“We expect yields to rise further, potentially reaching 17 percent for the 15-year bond,” she said, citing government’s growing reliance on domestic borrowing as external financing wanes.
The higher interest rates could reflect government’s confidence in economic stability, even as they may face greater price volatility if interest in external markets continue to increase.
Data from the Finance Ministry shows that by November – four months into the financial year - domestic government debt issuances for the 2024/2025 financial year totalled Shs9.5 trillion which was almost half of the Shs15 trillion issued in the entire 2023/2024 financial year.
Half of this financial year’s debt issuances have been used to fund budget items, while the other half has gone into refinancing public debt.
Lower interest rates help government to reduce interest payments, easing its debt burden.
However, if they fall below investor expectations, the bonds may require discounts to sell, complicating the issuance process. This strategy tests the market's appetite for cheaper borrowing but may signal a mismatch with investor demand. The two-year bond, which provides a short-term stable investment option for those seeking relatively quick returns, is expected to mature in July 2026, while the five-year bond will mature in August 2029.
The 15-year bond, which will pay its first interest on Thursday, matures in June 2039, while the next payment will come in July, which makes it a compelling option for investors looking to invest at the start of a payment cycle.
The three bonds offer varying tenors and interests, catering for different investor strategies, from short-term gains to long-term portfolio stability.
SECONDARY MARKET
Performance
Bonds are traded in the secondary market, which last week, saw a significant drop of Shs627.7b ($169.9m), or 38.52 percent, falling from Shs1.6 trillion ($425.83m) to Shs1.01 trillion ($271.33m).
Long-term bonds contributed the largest value, making up 46 percent of the total turnover, with Shs460.8b ($124.8m) in transactions, while short term bonds, which contributed Shs283.62b ($76.81m), accounted for 28.31 percent of the turnover.
The medium-term bonds registered a turnover of Shs257.41b ($69.71m), or 25.69 percent.
The June 18, 2023 bond was the most traded, making up 14.11 percent of the total turnover with Shs141.37b ($38.28m) in transactions.
