Government Sets the Price, Washington Raises the Stakes

Two auctions and one speech shaped Ugandan portfolios this week. The Bank of Uganda reopened three bonds and turned away over half the money offered for them, taking the cheap bids and rejecting the rest. In Washington, a new Federal Reserve chairman put inflation ahead of rate cuts, and traders spent the week repricing the odds of an American rate rise instead.

The two stories meet in the same place: whoever controls the price of money, in Kampala or in Washington, is currently in no mood to make it cheap.

The bond auction: Government sets the price

Bank of Uganda reopened three bonds on 26 August. It offered Shs 990 billion and received Shs 2.20 trillion in bids, more than twice what it needed, but accepted only about Shs 1.0 trillion. In plain terms, it took the better prices on offer and turned the rest away.

Two new long bonds come to market in September, on the 9th and the 23rd. If the same pattern repeats — long-term bond under-sold, middle-term bond over-sold — Government is signalling that it will not pay above 15% to borrow for 15 years or more.

Tax makes it worse. Withholding is charged on the whole coupon, including the portion that is really your own overpayment coming back, and you still lose that overpayment when the bond repays only face value. The shorter the bond, the fewer years there are to absorb the loss, so the damage falls hardest on the short end.

Once tax is counted, the 5-year is the strongest of the three, and it is the one Bank of Uganda was most willing to borrow from. The 2-year looks respectable at 11.70% but keeps only 8.43% after tax, less than a one-year Treasury bill pays. That gap is the first thing to check before buying anything short-dated.

The view from Washington

On 28 August, the US Federal Reserve’s new chairman, Kevin Warsh, said that bringing American inflation down, now 3.7% against a 2% goal, comes before everything else.

Investors had expected the Fed to cut rates. Within hours they switched to expecting a rise. The odds of an increase in September went from about 35% to 57%. The dollar gained roughly 1% on the week.

None of this is settled. Warsh deliberately refused to commit to any decision, and 57% is what investors are betting, not what the Fed has announced. The actual decision comes at its meeting on 15–16 September, and the American figures released before then, starting with the jobs report on 4 September, will move those odds either way. Treat what follows as a risk that could build or fade, not one that has already landed.

The tension to watch: Uganda’s interest rates are falling just as America’s may be rising. Money follows the higher rate, so foreign investors have less reason to hold Ugandan bonds, which pulls on the shilling again.

The week ahead: Wednesday’s Treasury bill auction

Short-term government borrowing is becoming cheaper. The 1-year Treasury bill yield fell from 11.5% in July to 11.0% on 5 August, while the three-month bill was unchanged.

The reason is strong investor demand, not scarcity. On 5 August, investors offered more than twice the amount Government wanted to raise, so Bank of Uganda could turn down the expensive bids and still raise enough. Investors accept these lower rates because inflation is only 4.0%, which still leaves a solid real return, and because the Central Bank Rate is 9.75%, leaving little better on offer.

This decline may not continue for long. The approved FY2026/27 budget has Government borrowing Shs 11.97 trillion domestically and refinancing a further Shs 13.97 trillion, close to Shs 26 trillion of paper to sell, weighted more towards long-dated bonds than last year. Strong demand is keeping rates low for now, but that supply could push yields back up later.

There is not much further to go in the meantime. The 1-year rate dropped by about 0.5 percentage points over the past month. The 3-month did not move at all, and it cannot fall much below the Central Bank Rate of 9.75%, which is the floor for short government borrowing. At 10.384%, it is almost there.

Three things worth knowing before you bid

What to do with this

What could change this: higher inflation, a US rate increase, a weaker shilling, or a sharp rise in oil prices could push bond yields higher. That could create better opportunities to buy longer-term bonds, but waiting also means betting that these events will happen.

Prepared by Glen Busobozi and Victor

Legacy Hills Investments works alongside a select group of Uganda’s licensed fund managers, giving our clients access to unit trust and money market options across the industry rather than a single house view. The partners below are the names you will see referenced across our research.

1. 01Old Mutual Investment Group Uganda (OMIG) Limited
2. 02Britam Asset Managers Company (Uganda) Limited
3. 03ICEA Lion Asset Management Uganda Limited
4. 04SBG Securities Uganda Limited
5. 05Sanlam Allianz Investments Limited
6. 06GenAfrica Asset Managers
7. 07Cornerstone Asset Managers Limited
8. 08Kura Asset Managers
9. 09Xeno Investments

Government now gets to choose which bids it accepts, at home and, if Washington follows through, its rates may soon be competing with a firmer dollar abroad. For Ugandan investors, the practical question is the same one that opened this issue: how much are you being paid to wait, once tax and reinvestment risk are counted, and is that enough. We will keep answering it every week.

Published by Legacy Hills Investments Limited, an independent investment advisor. This newsletter is for general information only and does not constitute investment advice. Figures are drawn from Bank of Uganda, Capital Markets Authority, URBRA, IRA and fund manager disclosures. Investors should confirm current rates before making decisions.