Heavy investor appetite drives Shs2.27 trillion bids in Treasury bond auction

KAMPALA — Investor demand for government securities remained strong this week, with the Bank of Uganda (BoU) receiving Shs2.27 trillion in bids at its Treasury bond auction, more than twice the Shs990 billion initially offered.

The strong showing at the August 12 auction points to continued appetite for government debt, particularly among institutional investors seeking relatively attractive returns amid stable inflation and a steady monetary policy environment.

The auction, which settled yesterday, reopened three benchmark Treasury bonds with maturities of three, 10 and 20 years.

Faced with the heavy demand, the central bank accepted Shs1.146 trillion, about Shs156 billion more than the amount initially put on offer.

The 10-year bond attracted the largest amount of bids, with investors offering Shs949.47 billion against Shs330 billion on offer. The 20-year bond followed with Shs861.63 billion in bids against an offer of Shs430 billion.

The three-year bond received Shs459.33 billion in bids against Shs230 billion on offer.

The figures translate into bid-to-cover ratios of 2.20 for the 10-year bond, 2.12 for the 20-year paper and 1.50 for the three-year instrument, indicating that demand exceeded the amount available across all three maturities.

The strong appetite was particularly notable in the longer-dated securities, suggesting that institutional investors remain willing to lock in returns over extended periods.

The 10-year bond, carrying a 16 per cent coupon, was priced at Shs108.581 for every Shs100 of face value, giving a cut-off yield of 15 per cent.

The three-year bond, which carries a 15.55 per cent coupon, was priced at Shs107.347 per Shs100, with a cut-off yield of 12 per cent.

Unlike the shorter and medium-term securities, the 20-year bond traded at a discount. The 15 per cent coupon bond was priced at Shs97.571 per Shs100, resulting in a cut-off yield of 15.65 per cent.

The pricing reflects investors’ differing expectations of returns and risk across the maturity spectrum, with the longer-term paper commanding a higher yield.

Commercial banks, pension funds and other institutional investors accounted for the bulk of competitive bids.

Of the Shs1.146 trillion accepted, competitive bidders took Shs306.42 billion in the three-year bond, Shs423.58 billion in the 10-year bond and Shs398 billion in the 20-year bond.

Non-competitive bidders, which include smaller investors, received Shs911.9 million in the three-year bond, Shs8.23 billion in the 10-year paper and Shs9.14 billion in the 20-year bond.

The latest auction comes as the central bank maintains its benchmark Central Bank Rate (CBR) at 9.75 per cent, while inflation remains within the monetary authority’s medium-term target.

Headline inflation has remained around 4 per cent, below the BoU’s 5 per cent medium-term target. This has helped preserve the attractiveness of government securities by offering investors potentially positive real returns.

The heavy demand also points to continued liquidity in the domestic financial system, with investors looking for avenues to deploy funds while government relies on the domestic debt market to finance part of its fiscal needs.

The strong uptake of the longer-term bonds could also provide the government with some certainty over financing costs, while giving institutional investors instruments to match their long-term liabilities.

However, sustained reliance on domestic borrowing also has implications for the cost of government financing and the availability of credit to the private sector.

For now, the latest auction indicates that government securities remain a preferred investment avenue, with investors showing willingness to absorb significantly more paper than the central bank offered.