The quest for Shs990b: Govt returns to debt market with longer term bond offers

Government will today return to the domestic market to borrow Shs990b through three debt instruments.

The instruments, which are a three-year bond with a yield or interest rate of 14.125 percent, a 10-year bond at 14.250 percent, and a 20-year bond at 15 percent seek to raise Shs230b, Shs330b, and Shs430b, respectively.

However, the interest rates, unlike in the September auction, are lower and have longer maturity.

The switch to longer-term bonds could indicate a desire to manage debt more sustainably, expectation of future rate increases, and confidence in the long-term prospects.

It also suggests that government wants to avoid the risks associated with short-term refinancing and lock in current rates for a longer period.

Longer-term bonds measure investor confidence in economic stability over the long run.

Bonds that carry longer-term maturing are subjected to lower taxes than shorter ones.

For instance, whereas the 20 and 15-year bonds will carry a withholding tax of 10 percent, the three-year treasury bill is subjected to a withholding tax of 20 percent.

The 20 and 15-year bonds are being offered at a time when the previous auctions in September yielded an interest of 16.5 percent, respectively, which demonstrates a trend of declining interest rates that had peaked in May.

“The decline in yields during the month follows the reduction in the central bank rate. Moreover, the sustained high demand for government bonds as indicated by a bid to cover ratio of 2.2 partly contributed to the decline in yields,” the Finance Ministry said in its August State of the Economy report.

The bid-to-cover ratio of 2.2 is an indication that for every bond available, investors are willing to buy more than twice as much, which sometimes drives prices northwards.

Market analysts say the performance of today’s auction will be key in determining the movement in the interest rates space, going forward. 

Government’s financing sources have been dwindling, worsened by an increase in interest rates in the external debt market, amid a rapid increase in financing needs.

Earlier this year, government missed out on the final disbursement of a $1b provided under the three-year extended credit facility programme from the International Monetary Fund that had been secured in 2021 due to failure to meet agreed objectives.

In its appraisal released last month, the IMF indicated that government had already used $870m from the programme, before it expired.

This has resulted in significant demand for cash through domestic auctions, in some of which, government has accepted more cash than earlier indicated in cases where there has been an oversubscribed auction.

The upcoming bond auction presents a chance for cash-flow-focused investors to purchase a discounted investment that will soon pay a coupon in January 2025.

Domestic borrowing

In August 2024, government raised a total of Shs2.6 trillion by issuing both short and long-term securities.

Shs1.29 trillion was collected from short-term securities, while Shs1.3 trillion was mobilized from long-term government debt. 

Out of the total funds raised, Shs2.03 trillion was used to pay existing treasury instruments that had matured – otherwise known as refinancing – while the balance of Shs560.9b was allocated to finance other the budget.

As Uganda navigates fiscal challenges, domestic borrowing remains crucial, especially following setbacks in external funding.

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