Bank of Uganda offers Shs1.4 trillion in Treasury bonds

The Bank of Uganda (BoU) is seeking to raise Shs1.4 trillion through an auction of government Treasury bonds, offering investors four securities with maturities ranging from two to 25 years.

In an invitation to tender issued on October 25, the central bank said the auction, scheduled for Wednesday, October 28, will involve reopening existing two-year, five-year, 15-year and 25-year Treasury bonds.

The offer comprises Shs250 billion in the two-year bond, Shs350 billion in the five-year security, Shs450 billion in the 15-year bond and Shs350 billion in the 25-year instrument.

The securities carry coupon rates of 15.25 percent for the two-year bond, 15 percent for the five-year bond, 15.25 percent for the 15-year bond and 16 percent for the 25-year bond.

The coupon rate is the annual interest rate paid on a bond’s face value. However, an investor’s actual return depends on the price paid for the security and the yield at which it is purchased.

The reopening of existing bonds allows the government to raise additional funds through securities already in circulation rather than introducing entirely new instruments.

According to the auction notice, the two-year bond matures on November 16, 2028, while the five-year security matures on May 20, 2032. The 15-year bond matures on September 5, 2041, and the 25-year instrument on July 7, 2050.

The auction will take place on October 28, with settlement scheduled for the following day, October 29.

Banks lead bidding process

BoU said primary dealer banks and other commercial banks must submit competitive and non-competitive bids through the Central Securities Depository by 10am on the auction date.

However, only primary dealer banks are permitted to submit competitive bids. These include Absa Bank, Citibank, Centenary Bank, DFCU Bank, Housing Finance Bank, Stanbic Bank and Standard Chartered Bank.

The minimum competitive bid is Shs200.1 million, while the minimum non-competitive bid is Shs100,000.

The central bank said non-competitive bids would be accepted in full at the auction’s cut-off price or yield, subject to a maximum of Shs200 million per tenor.

Successful competitive and non-competitive bidders will be allocated securities at a single price, corresponding to the lowest accepted auction price and the highest accepted yield.

BoU also reserved the right to increase or reduce the amount offered, as well as accept or reject applications in whole or in part.

Investors face different tax rates

The bonds have different withholding tax rates, with the two-year security attracting 20 percent and the five-year, 15-year and 25-year securities each attracting 10 percent, according to the auction notice.

The difference in tax treatment is a consideration for investors comparing the securities, alongside the coupon rates, purchase prices, yields and the period for which their funds will be committed.

Longer-dated bonds can provide investors with predictable coupon payments over an extended period, but they also expose holders to greater price fluctuations when market interest rates change.

Investors who sell before maturity may receive more or less than the price they paid, depending on prevailing market conditions.

The auction forms part of the government’s domestic borrowing programme through Treasury securities, which provide a channel for financing public expenditure while offering banks and other eligible investors an avenue to invest in government debt.

The central bank said the auction advertisement and general prospectus were available on its website.