Uganda’s economy continues to face significant pressure, particularly from persistent imported inflationary forces and the tightening of domestic liquidity.
The Bank of Uganda’s recent decision to raise the cash reserve ratio to 13.5% has further reduced the amount of money circulating in the economy. These developments have important implications for Treasury bonds, private sector borrowing, and the broader investment landscape.
Today’s Treasury bond auction reflects these pressures clearly. A key question now is how long these conditions will persist and whether investors will continue to find meaningful value in government securities, especially as the Uganda shilling remains under pressure against the US dollar.
The 25-year bond, which was the main reference point in today’s auction, recorded a cutoff yield of 16.25%. That represents only a 25-basis-point increase from its previous auction at the end of July. However, market expectations had already shifted sharply in recent weeks. As interest rates continued to fall through August and September, many investors last week were expecting the 25-year bond to clear at around 15.5% to 15.75%.
Against that backdrop, a 16.25% cutoff yield represents a more realistic 50-basis-point increase in borrowing cost for that long-dated instrument. Investors in the 25-year bond are therefore receiving only a very small premium, with limited upside relative to the risk being taken.
A similar pattern is visible in the newly introduced 15-year bond, which came out at a cutoff yield of 15.25% — now effectively its coupon rate. This is notable because it is higher than the 15% cutoff yield seen on the recently introduced 20-year bond two weeks ago. In normal market conditions, one would expect the 15-year bond to price below the 20-year instrument. Instead, the higher yield suggests continued pressure on longer-dated government securities.
By contrast, medium-term bonds have remained relatively stable. The five-year bond stayed at 13.75%, the same level recorded in August when it was last auctioned. The two-year bond also saw only a modest increase of 25 basis points. This points to a yield curve that is steepening at the long end, with investors demanding more compensation for holding longer maturities amid heightened macroeconomic uncertainty.
The auction also raised broader questions about the government’s financing strategy.
Bank of Uganda received bids worth nearly 1.2 trillion shillings in the 25 year bond and accepted just over 1 trillion. On one hand, this could be interpreted as a deliberate move to mop up excess liquidity from the economy, reducing funds available for private sector lending and helping to contain inflation.
On the other hand, it may also signal a growing need for domestic borrowing to support government financing requirements, especially in light of recent remarks from the Governor of the Bank of Uganda.
For now, the market is left balancing both possibilities. Whether this is primarily a liquidity management exercise or a sign of rising fiscal funding pressure, the result is the same: higher borrowing costs, tighter financial conditions, and a more cautious investment environment.
