Bank of Uganda only accepted Shs210b, leaving over Shs1.12 trillion on the table due to demands for higher interest. Photo / Edgar R Batte
As government struggles to plug growing budget gaps - fueled by supplementary expenditures, an upcoming election cycle, and ballooning financing obligations - investors are growing uneasy.
Their message is clear: ‘if you want our money, pay us more for the risk.’
But government is resisting the pressure, unwilling to hike interest rates to meet investor demands.
What is unfolding is a quiet but telling standoff in the domestic debt market, and neither side seems ready to barge - even for a second.
To understand this better, let’s look at the latest bond auction that happened on Wednesday (April 16).
The results show that government is being careful not to take on anything that could strain its budget.
Yesterday, Bank of Uganda released results of the bond auction, where three bonds - two-year, five-year, and 15-year - were reopened, at an interest of 13.5 percent, 14.25 percent, and 15.8 percent, respectively.
Two-year bond
Investors didn’t just want the two-year bond - they were happy to pay more than its face value - which only makes sense if you are really confident you will get your money back, plus interest, with no fuss.
The central bank had offered to take on Shs230b. But bids from institutional investors alone hit Shs288.9b, while Shs1.24b came from retail investors.
Retail investors got all their bids accepted, but the central bank picked Shs55.4 billion from institutional investors - rejecting Shs234.7 billion.
Five-year bond
Here, investors were a lot more cautious. Most wanted a discount, probably because they expect more risk over five years.
Government wanted Shs330b, but got bids worth Shs374.9b. However, Shs364.1b came with a catch - investors were asking for higher interests.
Only Shs10.8b bids (mostly from retail investors) were fairly priced and in the end, Bank of Uganda took retail bids, and just Shs114.4b from the institutional pile, leaving most of it on the table.
Why? Blame it on election season, growing debt, or inflation fears. The middle of the road - three to five years - is where investor confidence starts to wobble.
15-year bond
Oddly enough, the long-term 15-year bond drew more enthusiasm than the five-year one.
Government wanted Shs430b on this, but investors tendered a massive Shs666.3b, though most of it (Shs644.2b) came with demands for high yields.
Why? - this bond usually carries a juicy interest of above 17 percent, making it the darling. It’s risky, sure, but pension funds and long-term investors are happy to take the leap if it locks in a fat return. However, central bank only took Shs22.2b from the fairly priced retail bids, and Shs6.8 billion from institutional investors, rejecting the rest.
Despite the long maturity, the thinking is clear: if you have got time, patience, and trust in the government’s long game, this bond is worth the wait.
A bullish government move
One big takeaway from the latest bond auction: Bank of Uganda rejected a mountain of cash.
Investors submitted offers worth Shs1.33 trillion, hoping to scoop up government bonds of different tenors - ideally at juicy interest rates. But the central bank wasn’t in the mood to spend big on borrowing. It accepted only Shs210 billion, leaving over Shs1.12 trillion on the table.
To put this into perspective, government had planned to borrow Shs990b. Clearly, there was no shortage of interest. The catch? Most of the bids - especially for the 15-year bond - came with high expectations.
Investors wanted higher returns for tying up their money, yet government simply wasn’t ready to pay the price.
“It’s like they poured the entire auction,” says Simon Mwebaze, the Cornerstone Asset Managers managing director.
“But it makes sense. Government doesn’t want to borrow expensively, especially now when it’s under fiscal pressure,” he said, noting that the recently passed Shs4.2 trillion supplementary budget, most of which is expected to be funded through domestic borrowing, may have triggered investors to push for higher yields, seeing an opportunity to charge more.
In recent years, government has grown increasingly uneasy about the rising cost of borrowing, which is making public debt harder to manage.
However, investors aren’t just looking at today’s numbers. They are speculating that things could shift in the long run, especially with the budget cycle, elections around the corner, and the current issue of limited donor funding.
While current macroeconomic indicators remain stable, investor sentiment - particularly among foreign players and institutions like pension funds, insurance companies, and asset managers, is leaning cautious.
The question now is: Will this tough stance pay off? Because come May and June, things may get tight. That is when a chunk of existing domestic debt matures, and government might have to return to the market to refinance.
For now, the central bank is actively managing the yield curve - the relationship between interest rates and different bond maturities - as part of a broader fiscal strategy balancing budget deficits and upcoming debt repayments.
Eventually, government may have no choice but to borrow again.
And while it only accepted 21 percent of what it aimed to raise, government isn’t out of options.
It can still tap into: private placements with primary dealers, concessional borrowing (low-interest loans), and bond switches, which help to spread out repayments over time.
Where does the rejected cash go?
The secondary market might be the answer.
With most bids from institutional investors rejected – investors submitted offers worth Shs1.297 trillion, but the central bank only accepted Shs176.6b – leaving about Shs1.121 trillion in idle cash.
The question is: Where does all that money go?
Most likely, it flows into the secondary market, where bonds that were already issued are bought and sold. If that happens, we could see downward pressure on yields, commonly referred to as yield suppression.
“Anyone that was bidding on the 15-year bond in that auction and got their bid rejected was most likely looking for a return higher than 17 percent,” Mwebaze notes.
“The secondary market yield on that bond closed at 17.2 percent when the auction happened. So those who bought it there probably got better returns. But if the rejected money now moves into the secondary market, it could push yields down,” he says.
John Kamara, the XENO Investment country manager, agrees, saying funds from rejected bids in the recent primary bond auction are expected to make their way into the secondary market gradually.
This is classic economics - a play of supply and demand.
