Uganda’s Treasury market is offering investors less income on new securities than it did a few months ago, even as demand for government debt remains strong.
In August, the yield on the 364-day Treasury bill fell to 11% from 11.5% in July, while the 182-day bill declined to 10.5% from 10.7%. The 91-day bill held at 10.4%. All Treasury-bill auctions held during the month were oversubscribed, with the average bid-to-cover ratio reaching 2.42, meaning investors offered more than twice the amount government sought.
The trend continued into September, although not uniformly. At the September 2 Treasury-bill auction, the 91-day yield fell to about 9.75% and the 182-day yield to about 10%, while the 364-day yield remained around 11%.
The combination of strong demand and lower yields matters for investors because it changes the economics of entering the market today.
A Treasury bill bought at a lower yield provides less income than one bought when rates were higher. For an investor whose existing security is maturing, that creates reinvestment risk: the money may have to be placed into a new security offering a lower return.
For investors who already own longer-term Treasury bonds, however, falling yields can have the opposite effect.
Bond prices generally move inversely to yields. When market yields fall, an existing bond with a relatively high coupon can become more valuable because its fixed payments are more attractive than those available on newly issued securities. An investor can therefore benefit from both the coupon income and a potential capital gain if the bond is sold at a higher market price.
That distinction is becoming increasingly important in Uganda’s market.
In August, yields on the 2-year, 5-year, 10-year and 20-year Treasury bonds fell to 11.7%, 13.75%, 15% and 15.65%, respectively, according to the Ministry of Finance. The decline was attributed partly to strong demand and the reinvestment of proceeds from maturing securities.
September’s auctions showed that demand had not disappeared as yields moved lower. On September 9, investors submitted Shs1.14 trillion for a new 20-year bond against Shs430 billion on offer. The bond cleared at a 15% yield, while the 3-year and 10-year securities cleared at 12% and 15%, respectively.
The following auction was even more striking. On September 23, investors submitted Shs1.27 trillion for a 25-year Treasury bond against Shs350 billion offered. Government accepted about Shs1.04 trillion at a 16.25% yield.
The size of the bids suggests that investors are still willing to commit substantial capital to government debt even as returns have eased from earlier levels.
For professional investors, however, the response is not necessarily to chase the longest maturity. Robert Katuntu, Chief Investment Officer at Alpha Asset Managers, wrote in August that Uganda’s bond rally was pushing investors away from simply chasing yield and towards managing risk. His recent market commentary has highlighted duration, liquidity and the possibility that the easy capital-gains phase of the rally may be fading.
That is an important distinction because a 25-year bond does not necessarily mean an investor must hold it for 25 years. A bond can be sold before maturity. The challenge is that its market price will depend on prevailing yields and investor demand at the time. If yields rise after purchase, the price of an existing bond will generally fall, potentially producing a capital loss for an investor who needs to sell.
The difference between a bond’s coupon and its yield also matters. The coupon is the interest payment attached to the bond, while the yield reflects the return based on the price at which the security is bought. The September 23 auction illustrated this clearly: the 25-year bond was issued at a 16.25% yield, while the reopened 2-year bond, carrying a 15.25% coupon, cleared at a 12% yield.
For investors, therefore, the decision is becoming less about finding the highest headline rate and more about matching maturities to their needs.
A pension fund with long-term obligations may be comfortable taking duration risk to secure income over many years. A bank or fund managing shorter-term liquidity may prefer bills or shorter bonds. An individual investor may value the ability to reinvest within months rather than committing capital to a long-duration asset.
The falling yields also matter beyond investment portfolios, although they should not be treated as an automatic signal that bank loans will immediately become cheaper. Government securities influence the broader pricing of money, but commercial lending rates also reflect banks’ funding costs, credit risk, operating costs, competition and other factors.
The government itself has a direct interest in the direction of yields. Lower yields reduce the cost of issuing new domestic debt and can help contain the interest burden on the budget. But the benefit depends on whether the government can continue attracting sufficient financing without putting renewed pressure on domestic interest rates.
For investors, the current market therefore presents two different realities. New money faces lower returns than it could have secured earlier, while holders of older bonds can benefit if yields continue falling and bond prices rise.
That makes the direction of interest rates almost as important as the yield available today. Investors must weigh the income they can lock in against the flexibility they retain, the risk of reinvesting later at lower rates and the potential price gains or losses that come with holding longer-term bonds.
Uganda’s Treasury market is still attracting strong demand. The more important question for investors is what they are willing to sacrifice to secure that demand-driven yield today.
