Prime
Bondholders see reduction in earnings
Interest on government debt has reduced in the last two months. Photo / File
What you need to know:
- On Wednesday, government will issue three bonds through which it will seek to mobilise Shs330b more than the Shs640b it raised at the beginning of this month
Investors in the securities markets, particularly bonds where government borrows domestically to plug gaps in budget operations, are concerned about their potential returns in the medium term as interest rates begin to fall.
Government will return to the bond market on Wednesday in search of Shs990b. However, profit margins for bondholders have reduced.
On Wednesday, government will issue three bonds through which it will seek to mobilise Shs330b more than the Shs640b it raised at the beginning of this month.
The disproportionate amount of money government left on the table made the auction fascinating given that the bid-to-cover ratio was 2.6, which meant that although only Shs640b was raised, bids totalling Shs1.7 trillion had been received.
The turnout made the auction the lowest since government raised more than Shs1.13 trillion in September.
Bondholders have in the last few months demonstrated a large appetite for Uganda’s debt market due to rising interest rates, which had been rising since July.
However, currently, Bank of Uganda has slowed down, issuing more short-term and fewer long-term securities, which is likely to impact investor participation.
The move comes after Bank of Uganda this month reduced the Central Bank Rate to 9.75 percent.
Trading data from brokerage firm Crested Capital, which was available as late as October 21, shows that secondary market turnover decreased by 2.87 percent to Shs1.6 trillion from Shs1.65 trillion a week before.
Data indicates that long-term bonds traded for Shs160.47b, accounting for 10.03 percent of total turnover.
However, given that inflation is receding, coupled with low macroeconomic risks, there is a likelihood that the Wednesday auction will attract good participation.
Early this month, Dr Michael Atingi-Ego, the Bank of Uganda deputy governor, said the CBR had been reduced because of a better outlook for inflation, a strong shilling, primarily from robust coffee exports, and the geopolitical landscape stabilising.
Bond market investors will be keeping a close eye on the action of the Central Bank in regard to the CBR, whose movement impacts investor yields.
Dr Corti Paul Lakuma, a research fellow at the Economic Policy Research Centre, said at the weekend that yields on government debt fluctuate according to government's demand for cash.
“Inflation has been falling. The CBR follows inflation. The good thing is the Central Bank has a calendar of issuing securities, which allows it to balance out interest rates,” he said.
When the Central Bank lowers interest rates, it benefits given that interests on domestic debt recedes.
However, Dr Lakuma said this would be detrimental to investor interests who mainly seek to invest in high-return markets, noting that Bank of Uganda should find a balance that gives a fair return to investors, but at the same time doesn’t make debt expensive.
