BoU switches up bonds as payments fall due

The Bank of Uganda (BOU), acting on behalf of the ministry of Finance, Planning, and Economic Development, has unveiled plans to delay payment of government securities that are maturing soon, preferring to pay later but at a slightly higher rate.

Government issues securities in the form of treasury bills (short term) and treasury bonds (long term) as a means of sourcing money from the local financial market. At the time of maturity, government pays back the financial institutions at the agreed interest rate.

Last week, government announced that it would conduct two treasury bond switch auctions within the upcoming financial year of 2023/2024. These auctions, scheduled for August 23, 2023, and October 18, 2023, respectively, are designed to reshape the maturity structure of existing bonds, spreading repayment responsibilities over time.

Bank of Uganda said the purpose was to “minimize volatility in the domestic financial market.”

A treasury bond switch auction operates as a unique exchange where current holders of specific bonds are invited to voluntarily trade a portion of their existing bonds for preferred ones issued by the same government issuer. This maneuver is not a sign of financial instability; rather, it is a tactical maneuver to optimize debt repayment schedules and market conditions, some analysts say.

“When a bond comes closer to maturity, BoU will ideally get money from the government and pay back the bond holders or issue other bonds to pay off the current expiring bond, what most central banks globally are doing now is switching the bonds. From the upcoming maturing period, to longer-dated tenor bonds,” Alex Kakande, a chartered financial analyst, noted.

The advantages of these bond switch auctions extend beyond the government and reverberate throughout the economy. The auctions foster higher market liquidity, attracting prospective buyers and sellers to the bond securities market. By doing so, they effectively mitigate undesirable price volatility in the domestic financial market.

One particular bond set to undergo this transformative process is code-named UG12J1801248, with a 14 per cent interest rate, set to mature on January 18, 2024. Current holders of this bond, facilitated through their commercial banks, have the exclusive opportunity to exchange a portion of their bond holdings for other government-issued bonds.

This innovative transaction carries a barter-like essence, allowing investors to make this exchange without incurring any costs and reaping benefits instead. For investors, the bond switch offers several distinct advantages. The extended coupon payments ensure a steady income stream over a prolonged investment horizon, making government bonds an appealing prospect for those seeking security and financial stability.

Additionally, investors can tailor their investment portfolios to align with their preferences and strategies, effectively minimizing reinvestment risks, analysts explain. It is important to note that bondholders who opt not to participate in the switch will continue to receive their regular coupon payments and the principal amount upon maturity.

Further details about this transformative treasury bond switch can be found through commercial banks. As Uganda’s financial landscape continues to evolve, these strategic maneuvers are poised to enhance stability and growth while providing investors with valuable options to fortify their portfolios.