Bank of Uganda headquarters in Kampala. PHOTO/FILE


The A to Z of investing in treasury bonds

What you need to know:

  • Treasury bonds besides other investable instruments offer you very competitive market interest rates.
  • Bonds can be bought and sold in the “secondary market” after they are issued by the Central Bank on the behalf of the government or by the company/financial institution issuing it for the case of corporate bonds.

Bonds can be bought and sold in the “secondary market” after they are issued by the Central Bank on the behalf of the government or by the company/financial institution issuing it for the case of the corporate bonds.

While some treasury bonds can be traded publicly through exchanges, most trade over-the-counter between large broker-dealers acting on their clients’ or their own behalf. A bond’s price and yield determine its value in the secondary market.

Investors or individuals should invest in bonds (buy bonds) because they provide a predictable income stream. Typically, bonds pay interest twice a year. If the bonds are held to maturity, bondholders get back the entire principal. So bonds are a way to preserve capital while investing.

 Diversification is the underlying foundation of a well-balanced portfolio for an individual or company, and an asset class, treasury bonds of optimum diversification because of their weak relationship with other asset classes in the market.

Earning from capital markets
Most bonds provide the investor with “fixed” income. On a set schedule, whether quarterly, twice a year or annually, the bond issuer sends the bondholder an interest payment, which can be spent or reinvested in other bonds.

 Stocks can also provide income through dividend payments, but dividends tend to be smaller than bond coupon payments, and companies make dividend payments at their discretion, while bond issuers are obligated to make coupon payments.

 However, for you to invest in the bond market, the executive director operations Bank of Uganda, Dr Charles Abuka says you need to open an account with a commercial bank of their choice.

“Through the commercial bank, you open a CSD (Central Securities Depository) account at Bank of Uganda by filling up and submitting a simplified two-page CSD account opening form,” he said.

Yields at close of business on September 21, 2022

It is advisable to invest in government securities besides other investable instruments in the capital market because they offer you very competitive market interest rates.

Dr Abuka says the securities held by the individual can be liquidated as required at competitive rates in the secondary market, by simply approaching your respective commercial bank.

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

The other benefits of investing treasury bonds include: It helps you to build a sustainable saving culture if the investment is done consistently. You are assured of regular and fixed cashflows since the payment dates for interest and principal are specified. Particularly for SACCOs registered with and licenced by UMRA (Uganda Microfinance. Regulatory Authority), their proceeds from investing in government securities are Withholding tax exempt.

In addition, Dr Abuka says treasury bonds allow the investor to receive specific semi-annual coupon (interest) payments over the life of the bond. Interest rates offered and paid on investments in treasury bonds are higher as the tenor of the bond increases.

Regarding, how much money one should have from the lowest to the highest to buy treasury bonds, Dr Abuka says one needs a minimum of Shs100,000 to buy treasury bonds, and incrementally only in multiples of Shs100,000.

“In the primary market, all auction bids of Shs200 million and below fall into the Non-competitive category and will succeed automatically that is, they are price takers. Those of Shs2.1 million and above fall in the competitive category and will specify their preferred price while placing their bids. The secondary market does not categorise between competitive and non-competitive. There is no limitation on the maximum amount for one to buy treasury bonds,” he explains.

Investing treasury bonds does not mean on spot payments. It takes one some time to get paid.
Dr Abuka says that one is paid coupons semi-annually on the exact dates specified in the Invitation to Tender at the time of the issue, and the principal is paid with the last coupon on the maturity date of the treasury bond.

Government often issues treasury bills and bonds for fiscal operations purposes. Dr Abuka says to date, the total holding for T-bonds is Shs25.8 trillion and Shs4.8 trillion for T-bills, a total of Shs30.7 trillion.

The bond market is by far the largest securities market in the world, providing investors with virtually limitless investment options.  

In terms of the current percentage of government securities held by the offshore investors, computed statistics by the Central Bank show that the holding for offshore investors as at end August 2022 is 10.5 percent of the total.

Government bonds carry lower risk compared to other assets like equities, as the returns are guaranteed by the government. There are some market-related risks, but by simply holding on to the bonds until maturity, you can nullify the risk.

Although investing in treasury bonds is largely a risk free investment, there are some risks to a certain degree.

Dr Abuka says: “Government bonds are thought to be risk free since the government is considered the safest borrower. This is attributed to the fact that these bonds are issued, and their proceeds 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,” he added.

The chief executive officer of Uganda Securities Exchange (USE), Mr Paul Biwso tells Prosper Magazine that individuals can participate in buying bonds through the Uganda Securities Exchange (USE) because it is in the main instruments category in the stock exchange.

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

“It is cheap and direct. The 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 said.

Mr Biwso added: “For this particular investment segment in bonds; we are working with Centenary bank in the primary market.”
Mr Biwso said 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.  

To make Uganda’s bond market stronger and more vibrant, Mr Biwso says there is an arrangement going on between USE and the Bank of Uganda to have bonds listed and traded directly at USE.  The bond trading at USE will start next year in the second quarter.    

The Capital Markets is the part of a financial system concerned with raising capital by dealing in shares, bonds, and other long-term investments.

 The chief executive officer of Capital Markets Authority (CMA), Mr Keith Kalyegira said there are two main channels that the individuals can invest in the bonds through directly using banks and indirectly via Collective Investment Schemes (CIS).

 Mr Kalyegira says via the indirect channel -the CIS, they have more benefits than banks because the investment is managed by the fund managers and they get better deals in the secondary market.
“The CMA is encouraging people to invest in bonds through Collective Investment Schemes, the management of the investment is the fund managers not an individual,” he said.

 However, Mr Kalyegira says there is still need to develop a strong fixed income market in Uganda by not just having the treasury bonds being traded but also having a vibrant corporate bond instrument in the secondary market.

 “We want the fixed income market to grow. We don’t want to see only the treasury bonds being active, we want more activities in the corporate bonds also. Currently, corporate bonds have higher returns than treasury bonds,” he stressed.

 Strong capital markets play a big role in meeting the financial needs of the country’s development projects.