Treasury bond auction: BoU accepts Shs1.88 trillion as bond yield hits 18.5 percent

KAMPALA. The Bank of Uganda (BoU) has accepted Shs1.88 trillion in Treasury bonds, with the yield on the 25-year paper rising to 18.475 per cent, as policymakers seek to contain pressure on the weakening Uganda Shilling.

Results of the auction released on Tuesday, October 28 show that government accepted Shs1.881 trillion across four maturities, against Shs1.4 trillion initially offered, raising questions about the cost of domestic borrowing and whether higher returns on government securities can help restore confidence in the local currency.

The 25-year bond attracted the largest amount of accepted bids at Shs932.97 billion, more than twice the Shs350 billion offered. Its cut-off yield rose to 18.475 per cent, meaning investors whose bids were accepted at the cut-off price will earn a nominal annual yield at that level, subject to the bond’s cash flows and holding period.

The 15-year bond attracted Shs552.22 billion in accepted bids against Shs450 billion offered, with a cut-off yield of 17.925 per cent.

The shorter-dated securities recorded lower acceptances than the amounts offered. The central bank accepted Shs193.34 billion from the Shs250 billion offered in the two-year bond and Shs202.35 billion from the Shs350 billion offered in the five-year paper.

The results indicate that investors were more willing to commit funds to the longer-dated securities at the prices accepted in the auction, although the figures alone do not establish the reasons behind their preferences.

The auction comes amid sustained pressure on the Shilling, which recently touched Shs4,500 against the US dollar, its weakest level in more than three decades, as demand for foreign currency increased.

Bank of Uganda counter rates on October 23 put the dollar’s buying rate at Shs4,490 and selling rate at Shs4,500, while the currency has remained vulnerable to demand from energy importers and offshore investors adjusting their holdings of Ugandan government securities.

The central bank raised its benchmark Central Bank Rate by 2.25 percentage points to 12 per cent on October 14, in a move aimed at containing inflationary pressure from currency depreciation and higher international energy prices.

The question now is whether the higher returns on government securities will attract enough foreign capital to ease pressure on the foreign-exchange market.

Foreign investors purchasing Shilling-denominated bonds must first obtain local currency, potentially increasing demand for the Shilling. However, the attraction of the securities depends on whether their returns adequately compensate investors for expected currency depreciation, inflation and other investment risks.

The auction results do not disclose how much of the accepted bids came from foreign investors. Consequently, the amount raised cannot be treated as evidence of new foreign-exchange inflows or an immediate improvement in the Shilling’s outlook.

There is also a liquidity dimension. Purchases of government securities can absorb Shilling balances from the banking system, potentially reducing funds available for other transactions, including foreign-currency purchases. The effect may, however, be temporary as government expenditure returns money to circulation.

Meanwhile, the higher yields could increase government’s domestic financing costs, particularly if elevated rates persist as existing securities mature and new borrowing is undertaken.

Uganda’s currency pressures extend beyond domestic liquidity. Higher oil import costs, demand for dollars from businesses and investors’ decisions to move funds into foreign assets have contributed to the recent volatility.

The Bank of Uganda has said its monetary policy response is intended to contain inflation and moderate exchange-rate pressure. However, the effectiveness of the measures will depend partly on the balance between foreign-exchange demand and supply.

For the Shilling to achieve sustained stability, higher bond yields would need to be accompanied by improved foreign-currency inflows, more moderate dollar demand and greater confidence in holding Ugandan assets.

The auction therefore offers a potential channel for supporting the local currency, but it does not by itself demonstrate that the depreciation has been contained.