No shortage of buyers for Ugandan debt


Appetite for Ugandan debt shows no sign of waning as yields continue to climb in response to soaring inflation. Meanwhile, investors in Kenya are staying away from Treasury bills as liquidity remains tight.


A bond auction in Uganda next week is expected to be oversubscribed as local pension funds and offshore investors chase yields above 20 percent.

Although this week’s Treasury bill auction was oversubscribed, yields moved higher after the Bank of Uganda increased its benchmark lending rate by 300 basis points to 23 percent to curb stubbornly high inflation. Uganda’s year-on-year inflation climbed to 30.5 percent in October, an 18-year high, figures released on Monday showed, Reuters reports.

The central bank offered 135 billion shillings ($51.6 million) of 91-, 182- and 364-day Treasury bills on Wednesday, receiving bids worth 293 billion shillings. The yield on the 91-day bill rose to 21.16 percent from 21.05 percent at the previous auction a fortnight ago. Those for the 182-day and 364-day instruments rose went up to 23.09 percent and 23.5 percent from 21.32 percent and 23.27 percent previously.
“The jump could have been larger than this but it coincided with month-end government releases into the system,” said Charles Katongole, head of asset liability management at Standard Chartered Bank Uganda. “We also had quite substantial offshore participation.”

Katongole estimated that offshore players took up about half of the auction, “in the region of 60/70 billion shillings.”

The central bank will offer 95 billion shillings in 2-year bonds next Wednesday. Given the central bank’s aggressive moves to fight inflation, traders expect the yield to be above 20 percent, a significant increase from the 15.21 percent reached at the last sale of 2-year bonds in July.
“It’s likely that we will see the average yield somewhere in between the 3-year and 1-year,” said Anthony Kirui, treasurer at Barclays Bank Uganda. “They’re all very close together right now.”

The 3-year bond yielded 23.78 percent at an auction in October, its highest ever level.

Kirui said he expected next week’s auction to be oversubscribed as the recent recovery in the shilling could draw in foreign investors.
“Looking at year-to-date (shilling) depreciation of around 13 percent the perception may be that against a yield of 20-plus percent you have a net positive return on your investment,” he said. “That in itself may look quite attractive to a foreign investor willing to take that risk.”

Foreign participation in the Ugandan bond market has increased in recent weeks despite the unresolved Eurozone debt crisis, though offshore investors have been less eager to participate in auctions in Zambia and Ghana amid declining global risk appetite. However, there is strong appetite for African sovereign debt, as demonstrated by Namibia’s debut $500 million 10-year bond, which was five and a half times oversubscribed.


Demand for Kenyan Treasury bills is expected to remain subdued as acute liquidity shortages continue to bite after the central bank increased interest rates on Tuesday and introduced new lending rules on reverse repurchase agreements on Thursday.

The bank will aim to sell 10 billion shillings ($103 million) in 91-, 182 and 364-day Treasury bills next week. However, auctions this week were undersubscribed, with the central bank rejecting a massive proportion of bids.
“Banks don’t have money and those that have money will apply for the treasury bills and increase the rate by about 1-2 percentage points to reflect the tight liquidity,” said Alex Muiruri, a fixed income trader at African Alliance.

The central bank said on Thursday that any commercial bank that borrows on the discount window more than twice a week will attract more scrutiny, further limiting the window as an avenue for liquidity. This came days after it raised its key lending rate by 5.5 percentage points to 16.5 percent.
“In the coming three weeks it’s going to get tighter, overnight may even hit 28 percent,” said a trader at Tsavo Securities. “I see 91- and 182-day will hit 20 percent this month.”

The yield for the 91-day bill shot up to 15.74 percent from 15.31 percent, while the 182-day rose to 15.74 percent from 15.36 percent. The subscription rate for the latter was just 18 percent, while it was 66 percent for the 3-month instrument. Yields on the 364-day stood at 14.5 percent at the last auction amid poor demand.
“The 364-day is going to flop every time they bring it. People are getting 30 percent on the sell-buy back,” said the trader, referring to the sale of securities between commercial banks. “Why should investors bother with the 364-day? Rates are going to go higher, but they are going to get less and less subscription.”

Traders said there would be greater appetite for the 91-day bill due to its short tenor and better returns compared with longer term papers.

Muiruri said investors were reluctant to lock in their money for long periods.


Demand for longer-dated Nigerian bonds is seen rising next week on the back of an expected increase in naira liquidity as the delayed budgetary allocations to the three tiers of government hit the system.

The disbursal of budgetary allocations from September oil revenues to the three tiers of government was due in the second week of October but was held up by what traders say is a row between the central and state governments over the handling of the account.

The funds were released on Wednesday and actual inflows are not expected until next week.
“We are expecting a bit of liquidity from the budget disbursal, which could spur buying of bonds and a slight drop in yields,” a senior bond dealer said.

Traders said the market has remained quiet with only a few dealers willing to provide quotes, substantially impacting on the volume of actual transactions.

Yields have also remained largely stable, with marginal increases this week.

The 3-year bond was trading at 15.36 percent from 14.88 percent on Monday, the 5-year was at 14.45 percent compared to 14.71 percent, while 20-year paper was at 14.01 percent from 13.68 percent.

There will be a public holiday on Monday and Tuesday.