Africa-Press – Uganda. Last week, government went to the market seeking trillions of shillings but rejected most investor bids because the interest rates offered were too high.
It has now become routine for government to turn down money it deems expensive.
Government rejected a substantial amount of debt in April it deemed expensive.
Last Wednesday, Bank of Uganda floated a two-year, five-year, 15-year, and a debutant 25-year bond.
Investors put forward Shs2.216 trillion, against BoU’s offer of Shs1.4 trillion, but BoU only sold Shs456.1 billion over cost-related issues, representing just 32.5 percent of the target.
By rejecting a lot of the bids, BoU was signaling that it wasn’t desperate to borrow and wasn’t willing to lock in expensive debt.
Investor demand, however, was through the roof.
Banks, pension funds, and insurance companies were all eager to snap up whatever was available.
The two-year bonds had six times more demand than supply. Five-year bonds were in exceptionally strong demand, with 35 times more bids than bonds available.
The 15-year bonds had double the demand, and the 25-year bonds nearly fifteen times.
A lot of cash was floating, but when it came to accepting bids, BoU made some very selective choices.
For the 15-year bond, it offered Shs400b and accepted Shs326.6b, while for the two-year bond, it offered Shs200b but took just Shs63.25b.
And for the debutant 25-year bond, BoU had offered Shs200b but only accepted Shs57.17b.
BoU rejected most offers for the five-year bond, accepting only Shs9b out of Shs300b offered.
By taking more long-term debt, BoU locked in funds for longer and avoided the hassle of refinancing too soon.
The shape of the yield curve in this auction was unusual. The two-year bond had a yield of 15.75 percent, five-year (15.5 percent), which is unusual because investors normally demand higher returns for long-term debt.
The 15-year bond jumped sharply to 17.65 percent, reflecting a liquidity premium, where investors want extra compensation for locking in their money in long-term debt.
But for the debutant 25-year bond, the yield was 16 percent.
At the end of the auction, investors had tendered bids worth Shs2.216 trillion, against Bank of Uganda’s offer of Shs1.4 trillion, but only took 32.5 percent or Shs456.1b of the bids.
The Shs456.1b, was largely composed of bids from the 15-year bond, with most rejections recorded in the five-year bond.
The five-year and 25-year bonds are new instruments, but analysts say it is puzzling for the 15-year bond to have a higher yield than that of 25 years.
“The yield curve from [these] results is defying expectations. In what world is a short-term 15-year bond having a yield nearly 160 basis points higher than the 25-year bond, which has just been issued at a striking low 16 percent yield,” Alex Kakande, a financial markets consultant, wonders.
What this pattern signals
In all bond offers, investors tendered more than what BoU offered, which means there is a healthy dose of investor appetite for government debt.
But BoU didn’t just take all that money. It rationed supply, considering price discipline and portfolio shaping by rejecting expensive short-term debt.
Policy and fiscal trade-offs
Accepting a large amount of the 15-year bonds at a high interest rate of 17.65 percent means the government is locking in long-term borrowing costs.
This is good because it reduces the risk of having to refinance too often, which can be stressful and expensive.
The Central Bank rejected most of the 25-year bids, which keeps it scarce in the market.
Keneth Legesi, a financial expert who is also the Ortus Africa Capital chief investment officer, explains that the limited acceptance of the 25-year bonds, despite strong demand, says that “the market was asking for higher yields, but BoU refused to agree”.
“By only accepting ‘non-competitive’ bids – basically, bids at or below a set price – BoU can stretch out government’s borrowing over a longer period without letting interest rates spiral out of control,” he said.
This approach is similar to how BoU has handled short-term Treasury Bills, particularly the 91-day bills, carefully managing interest rates despite strong demand.
Legesi calls this “passive yield curve control,” where the Central Bank allows some steepening of the yield curve, but avoids a sharp jump that could make borrowing very expensive.
The 25-year bond had a cut-off interest rate of 16 percent, which is a bit lower than what similar bonds are trading for in the secondary market (around 17.9 percent).
This supports the idea that BoU is managing the bond rollout carefully, rather than letting prices run wild.
Many portfolio managers believe that BoU’s cautious stance must be understood in the context of delayed donor funds, which creates pressure on government’s budget and increases the risk when reinvesting short-term funds.
Also, with Uganda’s 2026 elections approaching, investors demand higher returns for longer-term bonds because of uncertainty around fiscal policy and political risk.
Meanwhile, the Central Bank Rate (CBR) remains at 9.75 percent, even though inflation has risen slightly – core inflation is around 4.1 percent, which is still under the 5 percent target.
Catherine Kijjaggulwe, the head of financial markets at Absa, says that since Uganda’s bonds used to stop at 20 years at an interest of 17.9 percent, many expected the new 25-year bonds to have yields above 18 percent.
“But the first 25-year bond issuance came with a 16 percent [interest rate] because [government] wants to keep interest payments manageable. The amount of money accepted on the 25-year bonds was also low compared to other maturities, reflecting this careful cost management,” she says.
“Still, since the 15-year bond was issued at a higher rate (17.65 percent), many expect that the 25-year bond’s yield might need to rise closer to 17.5 percent in future auctions. Investors will be watching the November auction closely to see if the 16 percent rate holds or if it moves up toward levels similar to the 20-year bonds,” she adds.
Overall, BoU’s cautious approach in this auction highlights the delicate balancing act the Finance Ministry faces – managing borrowing costs amid fiscal pressures and economic uncertainty.
Source: Monitor
For More News And Analysis About Uganda Follow Africa-Press
