How To Invest In Treasury Bonds, Bills

by Business Times
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Treasury Bills and Bonds, also known as Government securities, are debt instruments issued by the Government through the Bank of Uganda when borrowing from the public. There are different types of government securities, but the most common are Treasury Bills and Bonds.

The investor (you) is essentially lending money to the government for some time and expects to be paid back the principal amount and the interest earned for the period of investment.

According to the Bank of Uganda (BoU), treasury bills are short-term (one year or less) debt instruments issued by Government regularly to the investing public. They are issued with maturities of 91days (three months), 182 days (six months), and 364 days (one year).

Bank of Uganda as an agent of the Government maintains records of Treasury bills on a computer register called a Central Securities Depository (CSD) system which generates statements of the investor’s holdings.

Treasury Bonds on the other hand are long-term debt instruments and are issued with maturities of two years, three years, five years, 10 years, and 15 years. They may be issued at par value, at a discount (below face value) or a premium (above face value).

Investors in treasury Bonds are paid a fixed coupon interest amount every 6 months based on the face value of the bond until maturity.  The investor could also earn interest by buying bonds at a discount.

Treasury bills and bonds are issued in multiples of Shs 100,000, starting with a minimum of Shs 100,000.

BoU publicizes details of an upcoming bond or bill through the local newspapers as well as on the Bank website (and also to all commercial banks).

To invest in treasury bills and bonds, one needs to open up Central Securities Depository (CSD) account in any commercial bank of their choice. The CSD is an electronic register, which is responsible for the registration of investors, auctioning of Government securities, creation and storage of investors’ electronic securities and redemption of securities at maturity.

On September 7, 2020, BoU appointed seven banks as primary dealers for government securities to enhance liquidity in the secondary market. The appointed banks include; Absa Bank, Bank of Baroda, Centenary Bank, DFCU Bank, Housing Finance, Stanbic and Standard Chartered.

“Investors should continue submitting their bids to their respective commercial banks as usual, where they will be well served. All commercial banks will continue to access the primary market for noncompetitive bids (below UGX 200 million). However, for competitive bids three (that above UGX 200 million), Non-Primary Dealer Banks will access government securities from the Primary Dealer Banks in the secondary market,” reads an excerpt from BoU press statement.

In FY 2019/20 according to statistics from BoU, the turnover in the secondary market was recorded at 41 per cent of the total outstanding stock of Government securities. This means that 59 per cent of the total outstanding stock of Government securities was not traded at all, and was simply held till maturity.

This is quite low compared to say, South Africa, where secondary market turnover amounts to 1,200 per cent of the total outstanding stock of Government securities. This means that in South Africa, the total outstanding stock of Government securities changes hands 12 times in a year, which substantially increases liquidity in the market.

Therefore, increased liquidity of the Government securities market enhances the attractiveness of the securities as it facilitates the ease of entry and exit into the financial market. It also strengthens a country’s ability to withstand exogenous shocks to the economy, as offshore investors would be more assured of price stability than the expectation of heightened volatility in illiquid markets.

Advantages of investing in treasury bonds and bills

Safety for your savings; these are considered to have little or practically no risk attached to them (risk-free investment). You will get your principal and interest payments. You’re guaranteed a certain rate of return on your investment.

Returns are predictable over time; unlike other turbulent investments, T-bills/bonds are known to remain relatively stable with predictable and certainty in payment of your returns. You are assured of regular and fixed cash flows since the payment dates for interest and principal are specified. Particularly for SACCOs registered with and licensed by UMRA (Uganda Microfinance. Regulatory Authority), their proceeds from investing in government securities are Withholding tax exempt

Good for long-term savings like education, and retirement; because T-bonds are typically risk-free investments, you might find them useful if you’re looking toward affording the best and complete education for your children or even a good life during retirement. In addition, they can help generate a steady stream of income through periodic interest payments.

No value loss: treasury bonds are considered extremely safe investments this is attributed to the fact that these bonds are issued, and their proceeds are paid in the local currency over which the government has control over. They however face interest rate risk since rising interest rates will result in falling bond prices, and inflation risk since inflation could reduce the purchasing power of a bond’s future coupon and principal payments

Government securities can also be used as collateral by the investor for borrowing purposes. This investment option allows the individual to diversify their portfolio into an investment with minimal credit risk.

The chief executive officer (CEO) of Uganda Securities Exchange (USE), Mr Paul Bwiso in an interview with Daily Monitor’s Prosper Magazine reveals that individuals can participate in buying bonds through the USE because it is in the main instruments category in the stock exchange.

CEO Of Uganda Securities Exchange, Mr Paul Bwiso (On the right)

Mr Bwiso says the USE has two stock brokers dealing with bonds directly and they include Dyer and Blair and Crested Capital which enables individuals to buy government bonds.

“It is cheap and direct. Investors have the opportunity to invest in government bonds without going through the Central Bank and going to commercial banks to open an account there. Here, we used USE SCD accounts,” he says.
Mr Bwiso says in the recent past, the number of individual investors in bonds via USE has tremendously increased and there are high prospects of growing it further.  

According to the Capital Markets Authority (CMA) September report, the level of savings and investment in Uganda’s capital markets has grown significantly.

The report indicates that Collective Investment Scheme (CIS) Managers had a total of UGX 1.30 trillion in Assets Under Management (AUM) at the end of June 2022, representing a growth of 13.7% from UGX 1.15 trillion at the end of March 2022.

The Umbrella Funds are invested in interest-bearing securities such as treasury bills, treasury bonds, corporate bonds, and fixed deposits with approved financial institutions.

Business Times Uganda

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