The Bank of Uganda mobilized 12 trillion shillings through the Primary Dealer Market Makers in the treasury bills and bonds over the year ended December 2021.
Another 1.4 trillion shillings was transacted during the same period through private placements, (as opposed to the open market auction) compared to UGX 10.9 trillion before the PDMM system.
Primary Market dealers are those dealers who buy treasuries directly from the Central Bank, while secondary dealers buy from these banks and deal with the public.
And a Primary Dealer Market Maker (PDMM) is an entity that stands ready to buy or sell a specific volume of securities at all times during trading hours. They do this by posting buy and sell prices on a publicly available platform.
“This way, you avoid situations where a buyer cannot find securities and vice versa,” says Arnold Derek Bagubwagye, Acting Director Financial Markets at the BOU.
In the secondary market, 42.7 trillion was transacted during the same period, compared to 10.9 trillion before the PDMM system, which was introduced a year ago.
The Central Bank says this is one of the indicators of the positive impact of the reform of the financial market that was launched in 2016.
Bills and Bonds are financial instruments through which the government mobilizes money from the public, as one of the ways of controlling money in circulation.
These instruments also referred to as government paper, are a source of investment by the public or other financial institutions on one hand and a way of borrowing by the government from the public.
Treasury Bills are short instruments for investment, usually between three months and 1 year, while Bonds are longer, with periods of 2, 3, 5, 10, and 15 years.
In the secondary market, 42.71 trillion was transacted during the same period, compared to 10.9 trillion before the PDMM system was launched a year ago. According to a survey by BOU, the bid-to-cover ratio, which is the measure of the total value of the bids received against the amount sold in an auction, rose to 2.1 from 1.6, previously. This is a reflection of increased demand.
The annual turnover or the annual traded volumes were 1.56 times bigger than the outstanding stock. Previously, this was 0.54 times.
The Bank calls for more collaborative initiatives between Dealers and the Ministry of Finance Planning and Economic Development aimed at lowering the securities yields or the amount of return an investor realizes on a bond.
“This will, in turn, form a synchronized yield curve across all the tenors, in line with the Central Bank Rate and thus lower commercial bank lending rates,” says Michael Atingi-Ego, the Deputy Governor of the Central Bank.
He says these measures will help them be recognized in the global markets.
“We are prioritizing global visibility of our Government securities and therefore primary dealers need to comply with the obligation to post two-way prices at all times during trading hours,” says Atingi-Ego.
The Bank is also in advanced stages to ensure that the financial markets can conduct borrowing and lending of securities, which should make money more available in the sector, and attract more investors.
There are now eight primary dealer market makers in the country, and the BOU has announced Standard Chartered as the best dealer for the period October 2020-September 2021.
Depending on the economic conditions and investor perspective of the economy, the treasury yield, or the return on investment on Treasury Bill ranges between 6.5 and 10 percent, depending on the length.
The yield for Bonds, which are longer-term than treasuries, is also higher at between 10 and 15%.
While these rates are lower than what the banks charge on a customer, they are more attractive than lending out loans to the private sector, because they are less risky.
“They are considered to have little or practically no risk attached to them (risk-free investment). You will definitely get your principal and interest payments. You’re guaranteed a certain rate of return on your investment,” says Housing Finance Bank in a statement.
–URN
