Falling Yields, Rejected Billions: Interest Rates Are Coming down.

Friends,

The latest auction results are not just disappointing; they are also giving us a very clear message about the kind of market we are in today. When you compare where we have come from in the last 2 years to where yields are now, it is becoming obvious that interest rates are coming down, and they are coming down quite fast.

The 15-year bond, which attracted most of the retail investors, came out at a 15.2% cutoff yield. This means investors are paying about a 5.4% premium.

For those who read my analysis articles, this is not a surprise because I had already indicated that the 15-year bond could end up around 15.0% to 15.45% after learning from 20-year bond that was auctioned two weeks ago. That gave a strong signal that the 15-year bond would likely follow the same direction—and that is exactly what has happened, even more than expected. In this case, the 15-year bond has reduced by almost 45 basis points, but still came with a fairly high premium.

The 5-year bond came out at 13.75%, and this is where the real surprise was for me. The last time the 5-year bond was auctioned, it came in at 14.25%, which at the time we considered too low. So the expectation was that this time round, the market would push the cutoff yield to above 14.25%. Instead, it has come down by more than 50 basis points to 13.75%. That means investors in the 5-year bond are now paying almost an 8.5% premium.

The 2-year bond has also followed the same pattern. It came out at a 11.7% cutoff yield, and investors there are paying close to an 11% premium.

All this is preparing us for the auctions coming in two weeks’ time. We need to remember that we are now in a period where interest rates are falling, and they are falling quite aggressively. So when the new 20-year bond gets introduced to the market on 10th September, we should expect to see the same kind of impact with its coupon rate even having a chance of being below 15%.

Another important point is the amount of money that was rejected. On the 15-year bond, government received bids of more than UGX 1 trillion, but rejected almost UGX 650 billion.

On the 5-year bond, bids were over UGX 600 billion, and more than UGX 200 billion was rejected. This means that in this auction alone, more than UGX 900 billion has been sent back into the market. That money is now looking for where to go next, whether in the secondary market or in the next primary auctions in September.