Uganda's two-year bond yield hits record high

UGANDA'S  two-year borrowing costs climbed to their highest ever levels at an auction on Wednesday a week after the central bank raised interest rates to fight runaway inflation.

The Bank of Uganda received bids worth 264.6 billion shillings ($102 million) at the auction of 2-year bonds, nearly three times the 95 billion shillings offered.

The yield jumped to 21.85 percent from 15.21 percent at the last auction in July. It was last at these levels in January 2004 when the bond was first issued, yielding 20.81 percent.

Pension funds and offshore investors seeking to take advantage of the high yields were the main participants in the auction, traders said.

"The expectation is that inflation is going to come down next year," said Charles Katongole, head of asset liability management at Standard Chartered Bank Uganda. "Locking away for two years at these levels would seem a good bet if you're taking a long term view on the country."

Year-on-year inflation rose to 30.5 percent in October, an 18-year high. Last week, the Bank of Uganda increased its benchmark lending rate by 300 basis points to 23 percent. It was the fourth time in as many months that the bank had raised its key rate.

The yield on the 2-year bonds could have been even higher if not for the strong demand. Traders had expected it to be in between 1-year paper at 23.5 percent and 3-year paper at 23.78 percent.

"There's a huge amount of interest in the 2- and 3-year bonds," said Anthony Kirui, treasurer at Barclays Bank Uganda. They are considered to be quite liquid bonds."

Ugandan 3- and 5-year bond yields have also surged to record levels in recent months amid stubbornly high inflation.

In September, the yield on 5-year bonds surged to 16.74 percent, from 12.75 percent at the previous auction in April. In October, the yield on 3-year bonds soared to 23.78 percent from 16.04 percent in September.

The soaring returns have sucked in a flood of foreign cash that has pushed the Ugandan shilling up more than 10 percent against the dollar in the last month.

It was at 2,583 on Wednesday, down 10 percent against the dollar this year.