Demand for Uganda securities unabated despite falling yields
KAMPALA, APRIL 20 – Demand for Uganda government securities remains buoyant with the last ten auctions reporting significant over-subscription despite a fall in interest rates.
Computed yields for different instrument as at end of April 8 2016 shows that they have come down from a high of 21 percent only recently to19.21 percent on the 15 year paper; 15.558 percent on 91days; 16.227 percent on 182 days, 16.197 on 364 days, 16.16 on two years, 18.34 on five years and 16.99on the ten year tenor.
Speaking to 256BN this week, Bank of Uganda’s Director for Financial Markets Mr. Stephen Mulema said despite this, the past 10 auctions have been “overwhelmingly oversubscribed”.
“Last Wednesday’s auction was oversubscribed by UShs161.21 billion, which was almost equal to the amount on offer. As a result, yields on one year paper have come down almost 7 per cent in a space of two months,” he said.
Lately Uganda’s financial markets have become relatively stable with a positive inflation outlook and a stable exchange rate.
Speaking about conditions in the secondary market, Mulema says the secondary market has increasingly become important in pricing saying that during this cycle of falling rates, the lower yields were first manifested in the secondary market trading and not the primary market as was the case in the past.
He added that the market has since the beginning of this financial year witnessed investors shift from the longer term to shorter term securities in response to changing yield curves.
“There is always a preference to lock in the higher rates when rates are coming down, and of course the capital gains are a lot higher for long term than shorter term tenors when rates are falling. Institutions that typically invest in short term are attracted to the one year and two year paper, while the others are attracted to the 5 year tenors,” he said.
The latest development in Uganda government debt market reveals that the rates have started coming down unlike in the past when they were so high.
With commercial banks holding 42.21 percent of Uganda government debt and pension and provident funds 35.78 percent, Mulema believes the trend will hold.
“My expectation is that rates will continue to come down as they have in the last 5 auctions in line with the improved outlook for inflation and the implied level of real interest rates,” he says.