KAMPALA - The Ugandan shilling gained on Wednesday, boosted by scant appetite for dollars, but traders said a drop in yields on government debt were a risk in coming weeks.
Commercial banks quoted the shilling at 2,517/2,522, up from Tuesday's close of 2,520/2,525.
"Demand for dollars is very sluggish because appetite from our corporate customers is still absent ... we're seeing the shilling picking up gains," said Faisal Bukenya, head of market making at Barclays Bank.
However, declining yields on government debt could put pressure on the shilling and erase Wednesday's gains, traders said.
"With the downward trend in yields, we're likely to see some of the offshore investors not rolling over their debt holdings once they mature," said Ahmed Kalule, trader at Bank of Africa. "If that happens, dollar flows will decline and the shilling will come under pressure."
At a Treasury bill auction on Wednesday worth 105 billion shillings ($41.67 million), rates on the 182- and 364-day paper dropped by more than 130 basis points. The yield on 92-day bills edged up slightly.
At the latest Treasury bond auction, worth 130 billion shillings on Jan. 2, yields on two- and five-year bonds fell by more than 80 basis points.
Offshore buyers of government debt are a key source of hard currency for Uganda, east Africa's third-largest economy. Confidence in the shilling could wobble if the lower yields curb the appetite for the debt, traders say.