Yesterday, the government successfully mobilized Shs1.39 trillion from three bond auctions, surpassing the initial target of Shs950 billion by Shs441.7 billion. The funds, raised through the Bank of Uganda (BoU), will be used to finance the national budget.
The funds were secured through the issuance of a 10-year bond maturing in 2034 with a coupon rate of 14.25 percent, a 20-year bond maturing in 2043 with a coupon rate of 15 percent, and a three-year bond with an interest rate of 14.125 percent. According to a BoU notice, competitive bids required a minimum investment of Shs200.1 million, while non-competitive bids required Shs100,000.
Bids were submitted through the Central Securities Depository by 10:00 am yesterday. The Central Securities Depository accounts are managed by commercial banks on behalf of their customers.
The government plans to borrow Shs13 trillion this financial year from both local and foreign markets, with Shs4.1 trillion sourced locally. Domestic borrowing through securities helps the government avoid currency risks associated with foreign debt but can potentially crowd out the private sector from the credit market.
Public debt is projected to exceed Shs100 trillion this financial year due to debt servicing and interest payments. The Ministry of Finance indicated in the Budget Framework Paper that interest payments will reduce from 3.5 percent to about 3 percent of the gross domestic product (GDP) over the medium term. This aims to prevent crowding out the private sector by maintaining domestic borrowing at 1 percent of GDP.
Interest rates in the bond market have dropped since the July 11 auction. Cindy Hannah Kukunda, a chartered financial analyst and portfolio manager at ICEA Lion, attributed this to a strategy by the Ministry of Finance to cut back on interest expenses by re-opening bonds with lower coupon rates.
Denis Kizito, the director of market supervision at the Capital Markets Authority, noted that the government determines the coupon rates and can adjust them based on its need for funds. In times of shortfall, the government raises rates to attract investors.
Interest rates for bonds have decreased across the board. For example, the 20-year bond rate dropped from 16.5 percent to 15.8 percent, the 15-year bond rate fell from 16.3 percent to 15.5 percent, and the 10-year bond rate declined from 15.5 percent to 15 percent since May and June.
BoU data indicated that by June 2023, yield rates in the bond market had been rising, reaching between 16 and 15 percent. However, by August 2024, rates had fallen, prompting traders to recommend bonds with long-term tenors, such as the 20-year bond, which offers the highest coupon of 15 percent, for retirement or wealth-building investments.
Liquidity had been a significant issue in the domestic bond market, but market conditions have improved. However, Ms. Kukunda pointed out that many investors might seek higher yields abroad as offshore players show more interest in selling bonds. She expects most of the demand to come from local banks and fund managers looking to invest their excess liquidity.
