Treasury Bond Investments. The Opportunities in the upcoming 20-year Treasury Bond.
March 11, 2024
On March 20, 2024, the Bank of Uganda will be auctioning off the 20-year Treasury bond UG12L1806433 with a coupon rate of 15%.
This bond was first issued in July 2023 and maintains the lowest coupon rate among the 20-year Treasury bond class at a 15% coupon rate, in comparison to its counterparts issued in 2021 and 2022, which have higher coupon rates of 17.75% (UG12L0805428) and 18.5% (UG12L1408420) respectively. However, in the secondary market, UG12L1806433 has provided a higher yield of around 16%, exceeding the average yield of 15% being given on the Higher coupon rated bonds from 2021 and 2022.
Market analysts following the bond market project the yield of this bond to be about 16% plus, based on its last public auction in December 2023, which earned a yield of 15.99%, and a private placement in February realizing a yield of 16.75%.
With a new 2024/2025 Treasury bond Auction Calendar due for release in three months, there is speculation about whether the Treasury through the Bank of Uganda will issue a new 20-year Treasury bond with different interest rates or whether it will continue with the current one or even re-open the 18.5% or the 17.75%.
Following the rise in yields over the last three weeks from 15.65% to over 16.2% in the secondary market, we foresee a possible continued upward trend in this long-term bond in the coming months.
With its 15% coupon rate, the 20-year Treasury bond is a valuable investment, providing a consistent rate for the next 19 years (until its maturity on June 18, 2043). As the yield stands at 16%+, a generally favorable rate in Uganda, securing the bond could offer excellent returns. For instance, the current inflation rate of approximately 4%—predicted to stay within the 4% to 6% range—suggests an impressive 10% return on investment.
Uganda’s Inflation outlook for the last 10 years.
Side by side review of the inflation vs the yield return on Investment in long term Bonds.
One significant factor to note as we are two years from the election period is that government demands for money typically increase, and borrowing, both domestic and international, escalates. Given the recent revelations of corruption in the country, it is anticipated that political risk may increase and therefore should be factored into the investment decision. Given that this investment locks in capital for 20 years, with a 15% return, the ultimate question becomes whether it's worth investing now or waiting until July when a new auction calendar, potentially featuring a new 20-year bond with an altered coupon rate to consider political risk, is released. Alternatively, is it better to invest immediately and benefit from the interest income for the next three months, taking into consideration that the current yield may have already factored in the looming political risk?
Graph showing the Yield over a 10 year period, with significant spikes around election periods.
