Tension in Uganda’s bond market as Government refuses to bow to investor demands

A silent standoff is brewing in Uganda’s domestic debt market as the government digs in its heels, refusing to pay higher interest rates despite mounting fiscal pressure—and investors aren’t taking it lightly.

This week’s bond auction revealed just how tense the situation has become. Investors lined up with over Shs1.3 trillion in offers, eager to lend to a cash-hungry government—but only at a price. The Bank of Uganda, however, took a firm stance, accepting just a fraction of the bids and walking away from more than Shs1.12 trillion.

At the heart of the impasse is a clash of priorities: investors want higher yields to compensate for what they see as increasing risk—driven by ballooning public debt, election-related spending, and weak donor inflows. But the government, staring down a tight budget and surging domestic financing needs, is not willing to borrow at what it considers punitive rates.

The Auction Breakdown: More Demand, Less Acceptance

In the April 16 bond auction, three reopened bonds—two-year, five-year, and 15-year—attracted significant interest. But beneath the surface, investor behavior painted a picture of selective confidence:

• Two-year bond: Investors were optimistic, offering more than the government needed and even willing to pay above face value—a vote of confidence in the short-term outlook. Yet, Bank of Uganda accepted only a fifth of the Shs290 billion bid, suggesting it wanted to keep borrowing conservative.
• Five-year bond: This was the shaky middle. Despite receiving Shs375 billion in bids, most came with strings attached—demands for higher interest. The central bank accepted only Shs125 billion.
• 15-year bond: Curiously, long-term investors showed strong appetite for the 15-year bond, with Shs666 billion in offers. But again, the catch was high yield expectations. The central bank accepted just Shs29 billion.

In all, only Shs210 billion was raised—just 21 percent of the Shs990 billion the government had planned to borrow.

A Risk Premium Government Won’t Pay—Yet

This auction comes on the heels of a Shs4.2 trillion supplementary budget and ahead of an election year—both of which have heightened investor caution. According to analysts, government’s fiscal signals are triggering a shift in expectations.

“Investors are adjusting for risk,” says Simon Mwebaze, Managing Director at Cornerstone Asset Managers. “With a supplementary budget that leans heavily on domestic borrowing, they sense an opportunity to ask for more. But government is reluctant to lock itself into high borrowing costs.”

That reluctance may stem from a deeper concern: Uganda’s public debt is already stretching its limits. Accepting high rates now could set a costly precedent, especially as major domestic debt repayments loom in May and June.

Idle Cash and a Secondary Market Opportunity

So what happens to the Shs1.1 trillion in rejected investor funds?

Much of it is expected to flow into the secondary market—where existing bonds are traded. This could lead to yield suppression as investors chase already-issued bonds, potentially easing pressure on interest rates in the short term.

“Those who missed out on the auction may find better returns in the secondary market, at least for now,” says John Kamara, Country Manager at XENO Investments. “But if everyone rushes there, yields could fall, making the secondary market less attractive over time.”

A Broader Fiscal Balancing Act

Behind this bond market standoff lies a much larger issue: Uganda’s fiscal house is under stress. Donor support has waned, elections are around the corner, and the government is racing to plug budget holes without setting off alarm bells in the markets.

While the central bank is actively managing the yield curve, using tools like private placements, concessional borrowing, and bond switches, it may not have much room to maneuver if pressure intensifies in the coming months.

The message from investors is unmistakable: we’re still willing to lend—but only if the price is right.

The question is: How long can government hold its line before it is forced back to the table, cap in hand?