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Treasury Yields Expected to Tick Up as Bank Of Uganda Races to Save Shilling

The Ugandan shilling traded little changed on Tuesday but tight domestic liquidity and the prospect of a surge in inflows of dollars for a Treasury auction on Wednesday offered hope of gains.

The currency of east Africa's third largest economy fell earlier this month after the central bank cut interest rates by 100 basis points to 21 percent, reducing the premium for holding shillings at a time when domestic inflation is still high.

The currency hit a 2012 low of 2,620 per dollar on March 6.

Traders said foreign investors were still likely to take part in a sale of over 100 billion shillings worth of Treasury bills on Wednesday, given expectations that overall local interest rates - and yields - will remain high.

At 0843 GMT commercial banks in Kampala quoted the currency of Africa's leading coffee exporter at 2,475/2,485, unchanged from Monday's close.

"I don't think we're going to see any further dropping of yields because otherwise you risk creating a lot of trouble for the that plus tight liquidity conditions could see rates go up slightly tomorrow," Peter Mboowa, a trader at KCB Uganda, said.

"Shilling liquidity is tight and I think this is likely to push up yields at the auction. And if yields edge up again then we might start to see the return of offshore investors and a possible strengthening of the shilling."

Bank of Uganda (BoU) is due to sell Treasury notes of 91-, 182-, and 364-day tenors on Wednesday worth 110 billion shillings.

The market had earlier expected dollar purchases by the manufacturing and oil sectors to weaken the shilling this week, but that demand was yet to come through, traders said.

Foreign investors in Uganda's debt market - pulled in by record yields - were key in the shilling's recovery from its all-time low of 2,901 hit last September.

But the surprise cut of the central bank's main rate on March 1 sent the shilling and yields on government debt down, with the 91-day paper coming in at 17.2 percent at the last auction on March 7, compared to 19.5 percent at the previous sale.

"It's possible we could see yields tick up again at tomorrow's auction," said Faisal Bukenya, head of market making at Barclays Bank Uganda.

"But that's not certain for now so the market is fence-sitting until when results come out and we're able to see the level offshore component."


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