INVESTING IN GOVERNMENT SECURITIES (TREASURY BILLS AND BONDS) DEMYSTIFIED

The more I speak about matters of personal finance and financial literacy, the more I get to learn that many people are reluctant to invest in government securities, not because they don’t want but because of lack of information. In fact, more of them are willing and would be more than delighted to invest in government securities. Some of them have been made to believe that government securities are only a reserve of the commercial banks, big entities like NSSF or rich and experienced investors. However, do you know that each one can venture into this non risky investment option with as little as UGX 100,000? Yes, you read / heard me right. Just UGX 100,000. So, in this article, I try to explain to you about investing in government securities in the simplest way I can, for now.

Before we go any further, what are government securities? I am sure there are those wondering. Government securities refer to a set of instruments that are used by government to borrow money from the public. Our government borrows money from time to time to finance its different activities. This is so because there are frequent times when the government income falls short of public spending needs. To put it right, our government auctions its securities twice a month.

In Uganda, government securities include treasury bills and bonds. Treasury bills are used to borrow money for short term periods that do not exceed one year. The government through Bank of Uganda borrows money through treasury bills for three specific periods, that is, 91 (three months), 182 (six months), or 364 days (one year). On the other hand, treasury bonds are used when the government needs to borrow money for longer periods that exceed one year. Using treasury bonds, the government borrows for periods of 2, 5, 10, or 15 years.

Government revenue comes mainly from tax and non-tax revenue. Other sources of finances for government spending include donor funding /support as well as borrowing from foreign countries and entities. The government securities are used for internal borrowing or more precisely for borrowing that is denominated in the domestic currency, the Uganda Shilling. In practical terms, treasury securities may be regarded as paper assets that are created by the government. By issuing the securities, the government exchanges the paper assets for cash from the people, institutions, or agencies who are regarded as investors.

When the borrowing period expires, the government returns the money borrowed together with interest earned to the investors. Of recent, interest from government securities is very lucrative ranging in the double-digit percentages. compared to other investments, which are highly risky, government securities might be better option to those who understand the math of investment. Government securities have in the recent past clocked over 18.72 percent – a figure you are less likely to get from investing in fixed deposit accounts or even the much-coveted real estate. Surprisingly, very few people are taking up this investment option though the numbers are growing slowly.

A LESS RISK VENTURE YOU SHOULD NOT MISS

Government securities carry the least risk relative to other assets because they are backed by the strength, full faith and credibility of the borrowing state. States are believed to have the perpetual capacity to levy taxes. Because of that, they offer timely and predictable payment of interest and principal, hence the zero-default risk.

But wait, I am just an ordinary man and a novice. Would this be for people like me?

Well, as earlier mentioned, investing in government securities is open to everyone who possesses or has access to savings and is ready to lend to the government to earn interest. Individuals can invest in treasury bills and bonds for amounts starting from UGX 100,000. Currently, Investment in government securities is dominated by commercial banks, offshore (non-resident) investors, insurance firms, as well as pension and provident funds with commercial banks holding the largest share followed by by pension and provident funds, then offshore investors.

GETTING TO INVEST IN TREASURY BILLS AND BONDS

The sale of treasury bills and bonds is conducted through an auction. This means that the interest rates are market determined. Participation in the primary auctions is done through a set of commercial banks that are designated as ‘primary dealers. All fully fledged commercial banks are primary dealers for the same.

For an individual to invest in the government securities, he/she must open a central securities depository (CSD) account, where all the treasury bills and bonds transactions are registered. Commercial Banks and licensed brokerage firms can help you to open a CSD account so that you can invest through them. Primary dealers are well- capitalized financial institutions that have an undertaking with the central bank to facilitate open market operations as well as be the conduit for market making.

The (CSD) account is free and one does not need any minimum balance to open it. The primary dealer bank /firm you invest through is supposed to offer you advisory services – perhaps on what tenure you should invest in and when. The advice is free-of-charge. BOU publishes a calendar on its website and in newspaper on when auctions would take place. This happens every fortnight for treasury bills and on scheduled times for the bonds

GETTING YOUR MONEY BACK

One can get their money as and when they want even if the instruments have not matured – through selling in the secondary market or to banks. Secondary market is when the holder of the government security chooses to sell to another person before the maturity date.

You need to note that yields/interest earned on government securities are subject to taxation just like any other business.

WOULD LIKE TO LEARN MORE ABOUT INVESTING IN TREASURY BILLS AND BONDS?

Feel free to get in touch with me on 0772122994 or 0781819477 and we can discuss more. You can also hit me an e-mail via [email protected] on matters of personal finance and I will be happy to respond.

By Darious Nkwasibwe,

Financial Literacy Enthusiast and Trainer

0772122994

PS: Have you registered for the upcoming Personal Finance Mastery Training? If not, hurry and do so. We will be discussing all matters of personal finance including investment for beginners. Let your finances rock in 2020. You can register via this link https://cutt.ly/LeRTf6t