Uganda’s bond market has quietly transformed over the past three years, reshaping investor sentiment, fiscal policy, and economic resilience. This evolution reflects both challenges and opportunities. In addition, influencing how the government raises funds and how investors navigate risks in an evolving macroeconomic environment.
The bond market plays a crucial role in Uganda’s financial system. It provides the government with a stable source of financing while offering investors a relatively low-risk investment avenue. However, a closer look at recent trends reveals a more complex picture of resilience, risk, and opportunity
The Trends: Rising Yields and a Steepening Yield Curve
Over the past three years, bond yields to maturity (YTMs) have risen across all maturities, painting a complex picture of resilience, risk, and opportunity. This signals increasing risk premiums demanded by investors.
The other key trend relates to a steepening yield curve. A yield curve represents the relationship between bond yields and their maturities. A normal, upward-sloping yield curve suggests that investors demand higher returns for longer-term securities, compensating for risks such as inflation and economic uncertainty.
Over the past 24 months, Uganda’s yield curve has steepened noticeably. This means that the difference between long-term interest rates and short-term interest rates is increasing. In other words, long-term yields are rising faster than short-term yields as indicated in the table below. This highlights the progression of the spread between the long-term and short-term yields.
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The growing gap between short- and long-term yields over the past 24 months suggests investors are demanding higher returns to compensate for rising inflation expectations and increased uncertainty regarding Uganda’s long-term fiscal position.
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Why are the Yields Rising?
At first glance, these trends may seem concerning, as rising bond yields typically indicate higher borrowing costs for the government. However, they also signal important shifts in Uganda’s economic landscape as indicated in the following reasons.
Monetary Policy Adjustments: The Bank of Uganda’s decision to maintain its policy rate at 9.75% in February 2025 suggests that inflation risks remain a concern. A cautious approach to rate cuts has reinforced expectations that yields will stay elevated.
Inflationary Pressures: While inflation remains within a manageable range (4.2% in January 2025, up from 3.9% in December 2024), investors are factoring in the risk of rising prices over the long term, leading them to demand higher yields on longer-term bonds.
Global Market Influences: Uganda is not isolated from global financial trends. Higher bond yields in developed markets, particularly the US, have created competition for capital, prompting domestic investors to seek better returns on local bonds.
Increased Government Borrowing: The government’s growing reliance on domestic debt to finance infrastructure and social programs has increased bond supply. While demand remains strong, the larger volume of issuance requires higher yields to attract investors
What This Means for Uganda’s Economic Resilience
Despite the above-mentioned factors associated with rising yields, Uganda’s bond market demonstrates several signs of resilience:
Sustained Investor Demand: Recent bond auctions continue to be oversubscribed, indicating strong confidence in Uganda’s creditworthiness. Even as yields rise, the fact that demand remains robust suggests that investors still view Ugandan bonds as a safe and relatively attractive investment.
A Functioning Monetary Policy Framework: The bond yield movements reflect rational investor pricing based on macroeconomic fundamentals. This indicates that Uganda’s financial system is responding to policy signals in a predictable manner. This reinforces confidence in the central bank’s ability to manage inflation and economic stability.
Deepening of the Domestic Capital Market: The introduction of longer-dated bonds, such as the 20-year government bond (in July 2023), shows that Uganda is extending its debt profile. This allows the government to finance long-term projects at more sustainable rates while reducing short-term refinancing risks. It also reflects efforts to provide investors with a broader range of investment options.
The Flip Side: The Election Effect and What to Expect
Uganda’s bond market does not operate in a vacuum, it is influenced by political cycles, particularly during or just before election periods. Historically, election periods in Uganda have been associated with increased government spending, inflationary pressures, and shifts in investor sentiment. Given that elections often introduce policy uncertainty, heightened fiscal deficits, and currency volatility, these factors likely have a measurable impact on bond yields, investor demand, and debt sustainability.
Bond Market Behaviour in Past Election Periods
A closer look at past election cycles (2006, 2011, 2016, and 2021) reveals a consistent pattern in Uganda’s bond market. As election periods approach, the government ramps up public spending, often financing it through increased domestic borrowing. This surge in borrowing leads to higher debt-to-GDP ratios, upward pressure on bond yields, and in some cases, inflationary spikes as liquidity flows into the economy.
Bond yields, particularly on longer-term instruments, tend to rise sharply in the year before elections. This reflects the market’s anticipation of heightened government borrowing and macroeconomic uncertainty. At the same time, inflation pressures tend to build up, especially when pre-election expenditures outpace revenue collections. This forces monetary authorities to navigate a delicate balance between economic stability and political priorities.
Examining Uganda’s bond market performance across multiple election cycles allows us to identify these recurring trends and assess their implications for fiscal policy, debt sustainability, and monetary stability ahead of the 2026 elections.
The Story in Charts
Yield Movements
The data indicates that bond yields tend to rise sharply in the year before elections, reflecting increased risk perception, heightened government borrowing, and inflationary pressures.
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Government Borrowing Patterns
With the exception of 2006, election years have consistently witnessed higher government borrowing, resulting in increased debt levels relative to GDP.
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Inflation Trends: Pre-Election Spending and Price Pressures
Uganda’s inflation trends exhibit spikes in some election years, often reflecting increased public spending, currency fluctuations, and external shocks.
The Upcoming 2026 Elections and What to Expect in Uganda’s Bond Market
With Uganda’s next general elections approaching in 2026, historical trends suggest that the bond market will once again experience elevated volatility, shifts in yields, and increased government borrowing. However, the magnitude and impact of these changes will depend on fiscal discipline, inflation management, and investor confidence in the lead-up to the elections.
Key Insights
1. Government Borrowing is Likely to Increase
- In past election cycles, debt-to-GDP ratios have consistently risen due to heightened government spending on infrastructure, social programs, and campaign-related activities.
- Uganda’s debt-to-GDP ratio is already elevated, which suggests that further increases in borrowing could pressure credit ratings and debt sustainability metrics.
- If the government continues to turn to the domestic bond market to finance pre-election expenditures, bond yields especially for long-term securities are likely to rise as investors will demand higher risk premiums.
2. Election Uncertainty Could Flatten the Yield Curve
- Even though we are currently experiencing a steepening yield curve, if uncertainty increases in the lead-up to 2026, we may see a flattening yield curve. This would occur as short-term bond yields rise faster than long-term yields
- If investors expect post-election fiscal consolidation, long-term yields may not rise significantly, contributing to a flatter curve.
3. Inflation Could be a Wildcard
- Inflation has been relatively muted in recent election cycles, but past instances (such as 2011) show that excessive pre-election liquidity can trigger inflationary pressures.
- If the government opts for expansionary fiscal policies in 2025 and early 2026, inflation expectations could rise, prompting higher long-term bond yields.
4. The Case for Carry Trades
It’s important to also note that Uganda’s rising bond yields and political cycle dynamics don’t just affect domestic investors and policymakers. They also create opportunities and risks for carry trades. A carry trade is a strategy where investors borrow in a low-yielding currency (e.g., USD, JPY, or EUR) and invest in a higher-yielding asset like Uganda’s government bonds, profiting from the interest rate and/or exchange rate differential.
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Case Overview: Potential Carry Trade Setup and Calculation
In this case, we assume a US-based investor seeking to capitalize on Uganda’s higher bond yields. The investor borrows $1M in USD at a 4.50% Fed rate and converts it into Ugandan Shillings (UGX) at a spot exchange rate of 3,674 UGX/USD. The investment is made in a Ugandan government bond yielding 9.75% annually, with a holding period of 365 days.
At the end of the investment period, the carry trader repatriates funds back to USD, factoring in a 15% withholding tax on interest earned. To mitigate exchange rate risk, the investor hedges the position using a forward contract, setting an exit exchange rate based on covered interest rate parity (CIRP), which considers the interest rate differential between the Bank of Uganda’s central bank rate (9.75%) and the US Fed rate (4.50%). The trade assumes a forward period of 365 days, aligning with the bond’s maturity, ensuring predictable conversion back to USD.
We further posit that the carry trader enters the trade at the peak of the pre-election cycle, when the Ugandan Shilling (UGX) is expected to be at its weakest due to:
- Pre-election fiscal expansion, which drives up government spending and liquidity in the economy.
- Increased inflation risks, leading to higher bond yields as investors demand a premium for lending to the government.
- Currency depreciation, as foreign capital flows slow down or exits, exacerbating pressure on the exchange rate.
This timing allows the carry trader to capture the highest possible bond yields while positioning for potential post-election macroeconomic stabilisation. In other words, a scenario where:
- The government slows down spending post-election, reducing fiscal pressures.
- The Bank of Uganda tightens monetary policy, strengthening the Ugandan Shilling.
- Foreign investment flows return, stabilizing the exchange rate.
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This carry trade case demonstrates how election-driven market inefficiencies create profitable opportunities for tactical investors, while also underscoring the risks of excessive fiscal expansion in election years.
Furthermore, this carry trade if executed could lead to even higher yields on treasuries given the surge in foreign investor demand.
The Flip Side: Lessons from Ghana, Turkey, and Argentina
While a steepening yield curve could signal the above-mentioned positive factors, history has shown that misinterpreting these signals can lead to economic turbulence. Several emerging markets that have experienced similar trends faced unintended consequences when policymakers failed to act swiftly or proactively.
Ghana (2014 to 2016): The Risk of Unsustainable Debt
Between 2014 and 2016, Ghana also experienced steepening of its yield curve (just like Uganda is currently) as investors demanded higher risk premiums due to rising public debt and inflationary pressures (Inflation Rate rallied from 8.73% in 2011 to 17.45% by the end of 2016). Initially, this was seen as a healthy market adjustment. However, as inflation surpassed 17% in 2016, real interest rates became unsustainable. The government was forced into a $918 million IMF bailout to stabilize its fiscal position.
Turkey (2021 to 2022): Ignoring Yield Curve Warnings
Between late 2021 and early 2022, Turkey faced significant economic challenges characterized by high inflation, currency depreciation, and unconventional monetary policies. In September 2021, the Central Bank of the Republic of Turkey initiated a series of interest rate cuts, reducing the policy rate from 19% to 14% by December 2021, despite rising inflation. This approach led to a depreciation of the Turkish lira, which lost nearly 60% of its value against the U.S. dollar during this period. Consequently, inflation surged from 19.3% in August 2021 to 85.5% in October 2022.
The central bank’s reluctance to raise interest rates in response to escalating inflation eroded investor confidence, prompting foreign investors to withdraw from Turkish bond markets. This combination of a depreciating currency, soaring inflation, and unconventional monetary policies contributed to significant economic instability during this period.
Argentina (2018 to 2019): A Debt Crisis Galore
Between 2018 and 2019, Argentina faced a severe economic crisis characterized by a significant depreciation of the Argentine peso, high inflation, and escalating debt levels. In 2018, the peso lost more than 50% of its value against the U.S. dollar. This led the central bank to raise its benchmark interest rate to 60% in an effort to curb inflation and stabilize the currency.
The rapid currency devaluation contributed to a sharp increase in public debt, which rose from 57% of GDP at the end of 2017 to 86% in 2018, primarily due to currency depreciation. In response to these challenges, Argentina secured a $50 billion Stand-By Arrangement with the International Monetary Fund (IMF) in June 2018, marking the largest loan in the IMF’s history at that time.
Despite these measures, the economic situation remained precarious. By 2019, inflation had surged to the highest rate in 28 years, and this has continued to surge to levels above 200% as of the end of 2024.
The combination of high inflation, a contracting economy, and unsustainable debt levels led to a loss of investor confidence and significant capital flight. In August 2019, the Argentinian government announced plans to restructure its debt, effectively marking the ninth sovereign default in Argentina’s history.
Conclusion
The evolution of Uganda’s bond market presents both challenges and opportunities, especially as the country approaches the 2026 elections. While rising yields indicate higher borrowing costs for the government, they also reflect a maturing market that is adjusting to macroeconomic realities. The steepening yield curve signals shifting investor sentiment, underscoring the need for policymakers to maintain a balanced approach to monetary and fiscal policy to sustain confidence in Uganda’s debt market.
However, Uganda cannot afford to view these developments in isolation. Historical election cycles have demonstrated that government borrowing tends to rise sharply before elections, often leading to higher bond yields, inflationary pressures, and increased fiscal deficits. If pre-election spending is not managed prudently, Uganda risks a scenario where elevated debt levels and inflation spikes force post-election monetary tightening, increasing financial instability.
Cautionary tales from Ghana, Turkey, and Argentina illustrate that trends in Uganda’s bond market can serve as early warnings for deeper economic risks. A steepening yield curve could be a precursor to currency depreciation, capital flight, or debt distress if not properly managed. The ability to interpret these signals correctly and act proactively will determine whether Uganda capitalizes on its bond market evolution or falls into a cycle of unsustainable debt. As the 2026 elections approach, policymakers must remain vigilant in fiscal planning, transparent in debt management, and proactive in addressing investor concerns to ensure long-term economic stability.
Disclaimer:
The analysis and comments in this article are for informational purposes only and do not constitute investment, financial, or trading advice. Investors should conduct their own due diligence and consult with a qualified professional before making any investment decisions.
The figures presented in the carry trade case study are based on assumptions that may not reflect actual market conditions.
