By Bonds are a valuable investment option, offering predictable income streams and preserving capital while diversifying your portfolio. In this guide, we’ll delve into the world of bonds, covering everything from their basics to how to start investing.
Understanding the Secondary Market for Bonds
Bonds can be bought and sold in the secondary market after issuance by the Bank of Uganda on behalf of the government or by corporations/financial institutions. While some treasury bonds are publicly traded on exchanges, most transactions occur over the counter, involving large broker-dealers representing clients or themselves. A bond’s price and yield determine its value in this secondary market.
Why Invest in Bonds?
Bonds provide a consistent income stream, with most bonds paying interest semi-annually. Bondholders receive the entire principal back if held to maturity, making bonds an attractive option for capital preservation while earning.
Diversification and Earnings from Treasury Bonds
Diversification is critical to a well-balanced portfolio, and treasury bonds offer optimal diversification due to their weak correlation with other asset classes. They can enhance your portfolio’s stability. Most bonds offer “fixed” income, with regular interest payments, which can be reinvested or spent. In contrast, stocks can also provide income through dividends. However, bond coupon payments tend to be more reliable, as companies make dividend payments at their discretion, while bond issuers are obligated to make coupon payments.
Getting Started
To invest in the bond market, you need to open an account with a commercial bank of your choice. You can open a Central Securities Depository (CSD) account at the Bank of Uganda through the commercial bank. This process involves filling out and submitting a simplified two-page CSD account opening form.
Benefits of Investing in Treasury Bonds
Investing in government securities, including treasury bonds, offers competitive market interest rates. These securities can be easily liquidated in the secondary market through your commercial bank. They can also serve as collateral for borrowing, offering minimal credit risk.
Other benefits include;
- building a sustainable saving culture,
- regular and fixed cash flows, and
- Withholding tax exemptions for certain entities like SACCOs registered with the Uganda Microfinance Regulatory Authority (UMRA).
Interest rates on treasury bonds are higher for longer tenors, making them an attractive long-term investment.
Minimum Investment Requirements
To buy treasury bonds, you need a minimum investment of UGX 100,000, with subsequent increments in multiples of UGX 100,000. In the primary market, bids of UGX 200 million and below fall into the Non-competitive category, succeeding automatically, while those above UGX 2.1 million fall into the Competitive category, allowing specifying preferred prices. There is no maximum limit for buying treasury bonds.
Payment Schedule
Investing in treasury bonds involves semi-annual coupon (interest) payments according to specified dates in the Invitation to Tender. The principal is repaid with the last coupon on the bond’s maturity date.
Managing Risks
Government bonds are generally considered low-risk due to the government’s status as the safest borrower. However, they are subject to interest rate risk and inflation risk. Rising interest rates can lead to falling bond prices, while inflation can reduce bond payments’ purchasing power.
Investment Channels
Individuals can participate in buying bonds through the Uganda Securities Exchange (USE). USE has stockbrokers like Dyer and Blair and Crested Capital, enabling individuals to purchase government bonds directly. This cost-effective method eliminates the need to open an account with commercial banks.
Individuals can invest in bonds directly through banks or indirectly via Collective Investment Schemes (CIS). The latter offers benefits like professional management and access to better deals in the secondary market. The Capital Markets Authority (CMA) encourages investing in bonds through CIS to promote a solid fixed-income market in Uganda.
In conclusion, bonds are a versatile investment option with numerous benefits, offering a reliable income stream and capital preservation. Whether you invest directly through banks or indirectly through CIS, bonds can play a crucial role in your investment portfolio and financial well-being.
[Content repurposed from Daily Monitor].
