KAMPALA: In July 2024, Uganda’s government raised a significant sum of Shs 1,576.33 billion through the issuance of treasury instruments, a mix of Treasury Bills (T-Bills) and Treasury Bonds (T-Bonds), as highlighted in the Ministry of Finance’s latest economic performance report. This funding activity not only reflects the government’s strategy to manage its short-term and long-term financial obligations but also provides critical insights into the current trends and shifts in the yields of these financial instruments.
Understanding Bonds and Bills
Treasury Bills (T-Bills) are short-term debt securities issued by the government to finance its short-term liquidity needs. Typically, T-Bills have maturities of 91 days, 182 days, and 364 days. Investors buy these bills at a discount and are paid the face value at maturity, with the difference representing the interest earned. Treasury Bonds (T-Bonds), on the other hand, are long-term debt instruments, with maturities ranging from two to 15 years or more. T-Bonds pay periodic interest to the holder and are a crucial tool for financing the government’s long-term expenditure.
Key Trends in Treasury Yields
In July 2024, the government issued Shs 823.00 billion in T-Bills and Shs 753.33 billion in T-Bonds. Notably, the issuance of T-Bills was oversubscribed, with the average bid-to-cover ratio standing at a robust 2.57. This strong demand indicates investor confidence in these short-term securities, despite the overall decline in yields.
For the 91-day tenor, the annualized yield rate decreased from 10.7 percent in June to 9.9 percent in July. Similarly, the 182-day tenor yield saw a slight drop from 13.1 percent to 12.9 percent. The 364-day tenor yield, however, remained unchanged at 13.6 percent. These trends suggest a slight easing of inflation expectations or an anticipation of stable economic conditions in the short term.
On the T-Bonds front, the government issued three bonds with varying tenors—two-year, five-year, and 15-year. The yield on the two-year bond increased from 13.75 percent in April to 15.25 percent in July, indicating a rise in investor demand for higher returns over this period. Conversely, the yield on the 15-year bond slightly decreased from 16.50 percent in May to 15.80 percent in July, reflecting a more stable long-term economic outlook. The 5-year bond yield remained stable at 15.50 percent, consistent with its previous issuance in May 2024.
Market Insights and Projections
The mixed trends in yields across different tenors of T-Bonds highlight a complex market environment where investor sentiment varies depending on the maturity of the investment. According to a senior financial analyst, “The rising yield on shorter-term bonds suggests a degree of uncertainty or a higher demand for liquidity in the near term. However, the stability and slight decrease in longer-term bond yields may indicate that investors are confident in the government’s ability to manage its fiscal policies over the long haul.”
Implications for Private Sector Credit
The issuance and performance of government securities also have direct implications for private sector credit. In June 2024, the stock of outstanding Private Sector Credit increased by 1.3%, reaching Shs 21,919.51 billion. This growth was largely driven by a rise in Shilling-denominated credit, which saw an uptick from Shs 15,222.09 billion in May to Shs 15,629.53 billion in June. The increase in credit was supported by lower lending rates for Shilling-denominated loans and higher credit extensions, particularly in the trade, building, mortgage, construction, and real estate sectors.
Conversely, foreign currency-denominated credit experienced a decline from Shs 6,412.84 billion in May to Shs 6,289.98 billion in June. This drop could be attributed to exchange rate fluctuations and a cautious approach by businesses in borrowing foreign currency due to potential currency risks.
Conclusion
The government’s active management of treasury instruments through strategic issuance of T-Bills and T-Bonds is shaping the financial landscape in Uganda. While yields on these securities present a mixed picture, the overall demand remains strong, reflecting a balanced investor outlook. Meanwhile, the growth in private sector credit, especially in Shilling-denominated loans, underscores the ongoing confidence in the domestic economy. As the government continues to navigate fiscal challenges, these trends in government securities and private sector credit will remain critical indicators of economic health.
