Uganda is banking on reforms that came into force this month to attract more investors to its bond market.

On July 1, the Bank of Uganda suspended the flotation of three-year Treasury bonds to align its issues with those of other EAC countries, which have benchmark bonds for two, five, 10 and 15-year tenors.

It also increased the maximum non-competitive amount from Ush10 million ($3,800) to Ush200 million per tenor ($76,000).

The minimum amount for competitive bids in both Treasury bill and bond auctions is Ush200 million ($76,000) + Ush1,000 ($0.30).

Director of financial markets at the Bank of Uganda Stephen Mulema said last Monday that benchmark bonds provide a reference for pricing other instruments on the market.

“Investors prefer instruments that are more liquid, as this is a sign that the cost of entry and exit into the market is minimal. This further supports more efficient pricing of other financial instruments,” he said.

Corporate bonds, for example, are priced at a premium off the reference price to attract investors to what are considered riskier undertakings.

Alpha Capital managing director Stephen Kaboyo said the measures were aimed at reducing debt service costs. He said investors often pay a premium for a security that can easily change hands in the secondary market, reducing the need for Treasury to redeem maturities.

“The reform is in line with market preferences. Market turnover has grown over the years and Uganda’s fixed income space has been attractive to offshore investors,” Mr Kaboyo said.

Mr Mulema said the bonds would be large enough to accommodate trade without significant movements in price.

“We currently have about 40 bonds outstanding, and we consider many of these to be too small to be liquid. It is therefore necessary to reduce the number of government securities by having fewer issues, and consolidating the others through buy-backs and conversions,” he said.

Under the East African Community Monetary Affairs Committee, Uganda, Kenya, Tanzania, Rwanda and Burundi have agreed to harmonise the tenures of debt instruments.

Last month, Uganda’s Minister of Finance Maria Kiwanuka said Ush1.437 trillion ($548 million) would be financed from the domestic debt. In the past financial year, Uganda borrowed Ush1.7 trillion ($650 million) through Treasury bills and bonds following revenue shortfalls and suspension of aid.

READ: Uganda to increase borrowing

The current stock of Treasury bills and bonds issued is Ush8.3 trillion ($3 billion). Offshore investors hold about Ush1.1 trillion ($420 million) or 13.25 per cent of the stock.

Mr Mulema said what needs to be bought from the market will depend on the cash flow requirement of government, amounts maturing that need to be rolled over, and market conditions.

“We endeavour to have stable issuance amounts to minimise volatility of interest rates,” he said.

The current yields on the different tenors in Uganda range between 12.6 per cent and 14.2 per cent.

With the outlook for core inflation at five per cent, investors in government securities are earning more than seven percentage points in real interest.