Uganda 15-year bond up for auction on Dec 4

According to the Bank of Uganda, the bond’s coupon rate will be determined at the auction. Photo/File 

By BERNARD BUSUULWA, The EastAfrican

In Summary

• This is welcome news for investors keen on longer term debt instruments.

After nearly two years of waiting, Uganda’s 15-year Treasury bond is scheduled for its pioneer auction on December 4.

The development, which is expected to bring down interest payments incurred by government through increased focus on long term bonds, is good news for investors who have been eyeing longer term debt instruments.

The bond is valued at Ush80 billion ($31.6 million) but its coupon rate is to be determined during the auction, according to the Bank of Uganda (BoU), reflecting uncertainty over its benchmark price.

The 15-year bond is expected to cater for the government’s huge domestic borrowing needs this financial year, estimated at Ush1,040 billion ($411 million) while minimising the interest burden that has surged in recent years due to massive flotation of  short-term Treasury bills in 2011/12. Long term bonds bear lower interest costs while investors enjoy higher returns pegged to low and stable inflation rates.

Total interest payments incurred on domestic debt rose from Ush435 billion ($171.9 million) in 2010/11 to roughly Ush800 billion ($316 million) in 2012/13, according to the Ministry of Finance, Planning and Economic Development

“This auction will help meet some of government funding requirements in the domestic market. I expect more local participation than foreign interest in this auction due to its relatively small size. But I cannot confirm plans for issuing the seven year bond,” said Stephen Mulema, BoU director for financial markets.

Analysts are seemingly upbeat about the debut auction but worries about future market liquidity have also emerged.

Shy commercial banks

“The National Social Security Fund is most likely to take up much of the 15-year Treasury bond because many of the commercial banks lack mandates for investing in debt securities that are longer than 10 years.

Longer term paper usually provides government with cheaper borrowing options and more attractive returns for investors over the long term,” explained a financial trader at Stanbic Bank Uganda who requested anonymity.

“Provision of an auction calendar has made it easier for investors to absorb such securities without inconvenience. But too much reliance on a few institutional investors kills liquidity.  Such investors tend to buy and hold rather than  to trade,” noted Stephen Kaboyo, a financial analyst and forex dealer.

Entry of the 15-year bond offers much needed relief to large institutional investors like NSSF, that have in the past sought longer term securities to match growing portfolios of long-term savings so as to maximise returns on investment.

More diversification into long-term securities among these investors helps increase returns on investment by linking long-term savings to long-term assets that yield more over a longer period.

This instrument also provides a more reliable pricing tool for mortgage players that offer products of 15-20 years, leading to less complex valuation of mortgage rates and risk exposure. 

However, lack of clarity over issuance of a seven-year bond that was similarly scheduled for 2011 has provoked doubts among market players over its fate.