Govt back in the bond market, mobilises Shs1.4 trillion 

The money was raised through a 10-year bond that matures in 2034 with a coupon rate of 14.25 percent, a 20-year bond that matures in 2043 with a coupon rate of 15 percent, and a three-year bond at a 14.125 percent interest.

A BoU notice had earlier indicated that for competitive bids, the minimum amount placed in the auction would be Shs200.1m, while non-competitive bids it would be Shs100,000, 

Submission of the bids through the Central Securities Depository had closed earlier yesterday by 10:00am. 

The Central Securities Depository accounts are opened by commercial banks on behalf of customers.  

Government expects to borrow Shs13 trillion this financial year from local and foreign markets, of which Shs4.1 trillion will be sourced locally. 

Governments borrow domestically through securities sold by auctions or directly to investors and treasury bills and bonds, for which investors bid, indicating how much they can invest. 

Domestic borrowing helps government to avoid foreign debt-related currency risks, but risks crowding the private sector out of the credit market.   

Public debt is expected to grow above  Shs100 trillion this financial year due to costs related to debt servicing and interest payments. In the Budget Framework Paper, Ministry of Finance indicated that over the medium term, interest payments will reduce from 3.5 percent to about 3 percent of gross domestic product to avoid crowding out the private sector by keeping domestic borrowing at 1 percent of GDP. 

There has considerable drop in interest rates in the bond market since the July 11 auction, which Ms Cindy Hannah Kukunda, a chartered financial analyst and portfolio manager at ICEA Lion, said: “Is a strategy by the Ministry of Finance to cut back on interest expenses by re-opening bonds with lower coupon rates”. 

Capital Markets Authority’s director of market supervision Denis Kizito, said government determines the coupon rates and “depending on how badly it needs the money, it can increase or reduce the rates,” noting that in times of total shortfall, government puts the rates up to attract investors. 

Interest rates on all bonds have reduced from 16.5 percent, for a 20-year bond to 15.8 percent, while those of a  15-year bonds have dropped from 16.3 percent to 15.5 percent. Rates on a 10-year bond are now at 15 percent from 15.5 percent in May and June.  

“This trend has been consistent across all tenors of treasury bills and bonds,” Mr Kakande says, noting that peak yields this year occurred between June 10 and June 20, but by July 24 there was a noticeable drop across various positions, which suggests that upcoming auctions may also experience a decrease in interest rates. 

Problem of liquidity  

BoU data indicates that by June 2023, yield rates in the bond market had been steadily rising between 16 and 15 percent, but by August 2024, they had fallen, prompting traders to advise investors to invest for retirement or build wealth, which can be more feasible in bonds with long term tenors such 20 years that offers the highest coupon of 15 percent.                                                       

Previously, liquidity was a problem in the domestic bond market, both on auctions and in the secondary market.                                  

But Ms Kukunda says: “Market liquidity has improved, but most investors are expected to seek higher yields [abroad] as offshore players continue to show more selling interest in the bond market.                                            

“We [now] anticipate that most of the demand will come from local banks and fund managers looking to invest their excess liquidity,” she says. 

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