A teller counts money in a bank. Treasury bills have registered a good number of investors for the government securities. PHOTO/file
Often times, potential investors are not sure about which investment can reap the highest gain. But investing in treasury bills can be a viable opportunity.
Treasury bills are believed to have a number of investment opportunities that can offer huge returns on investment if explored.
Mr Isaac Simba, corporate dealer in corporate and investment banking markets at Absa, explains that treasury bills are a short-term government debt security maturing in one year or less.
“Government securities are instruments used by the government to borrow money from the public. Treasury bills are one of the instruments that are used by the government to borrow money from the public with their main differentiation from Treasury bonds being the tenor/period of investment,” Mr Simba says.
The treasury bills are short-term borrowing instruments, with the short term being either 91 days, 182 days or 365 days.
Treasury bills are therefore a form of investment for the public, offering guaranteed risk-free returns.
Mr Simba notes that Treasury bills are purchased in two ways; (primary market or secondary market), depending on certain conditions.
The Primary market is one in which the government borrows directly from the public, that is market of first issue/auction of government securities like Treasury bills.
“This market is largely open to Primary dealing banks such as Absa bank, but calls can also be accessed by customers who wish to invest up to Shs200m through their commercial bank. For amounts above Shs200m, individuals would need to purchase these on the secondary market,” he adds.
The Secondary market is where treasury bills (and bonds) are traded after the government has already issued them on the primary market.
He explains that the secondary market enables all investors who were not able to participate in the primary auction to purchase securities and for those that already hold; to sell to any other investors that are interested.
Taking part in the secondary market requires a few things, starting with a bank account as well as a CSD (Central Securities Depository) account. The CSD account is your account with Bank of Uganda, but opened up through a mandated bank, such as Absa. It is on this account that your treasury bills are kept.
Mr Simba adds: “It is then followed by an expression of a client’s requirement in terms of what they want to buy/sell (amount, period, yield among others) and when in agreement with a Primary Dealing (PD) bank, a customer will fill a Purchase (or Sell) form that the PD will use an instruction to debit the customer account and credit their CSD.”
Advantages
Treasury bills, Mr Simba explains, are referred to as Over The Counter (OTC) instruments which can be negotiated amongst buyers and sellers and exchanged at will and independent of a centralised exchange.
Centralised exchanges are trading platforms that function like traditional brokerage or stock markets.
This means a customer who wishes to buy or sell a treasury bill can walk into a bank and have a discussion with the appropriate department and agree on what they want to do.
While trading involves interest rate, amount and tenor of the bill; there are no outright costs involved in trading bills, for example there are no fees charged.
Simba says that investment amounts can be as low as Shs100,000, they are passive income generating assets that also offer principle protection ( capital is more or less guaranteed), risk free investments for example, there is no possibility of losing money due to default.
In addition, Treasury bills can be used as collateral to access loans and returns on government bills are relatively higher than many other equivalent assets.
Treasury bills are liquid, meaning whoever owns a bill can liquidate it and get cash very easily without losing interest earned.
However, like any other assets that change in value depending on a number of factors, he notes that Treasury bills face the most salient economic factors as seen below.
“Fiscal conditions - a wider budget deficit, for instance, implies that the government will be more willing to borrow, and can imply higher rates, inflation levels, liquidity levels that is to say how much money is in supply in the economy,” he says.
Ms Charity Mugumya, the director communications, Bank of Uganda (BoU), says like every other standard investment, the money earned from Treasury bills and bonds comes from the passage of time.
“The longer the period of investment, the higher the income earned. In the most recent auctions, the following were the interest rates that investors got entitled to depending on the tenure of their investment,” Ms Mugumya says.
These rates are determined by the participating primary dealer banks in a particular auction; Bank of Uganda does not fix these interest rates for investors.
If a person invests ‘[for instance, Shs100,000, the amount of money he expects to get at the end of 3 months or 3 years will depend on the choice of time to maturity of the investment.
Ms Mugumya adds that from the interest rates indicated in the Table 1 above, three months (or 91 days) would earn a rate of 7.011 per cent per year while three years would earn interest of 15 per cent per year.
How money multiplies over the years
To understand how money multiples, consider an investor who puts Shs100,000 in a three-year government bond at a rate of 15 per cent (in Table 1).
She explains that in the first year, interest earned and paid into the investor’s commercial bank account would be 15 per cent of Shs100,000 (or Shs15,000); this would continue for three years earning a total interest of Shs45,000 over the three-year investment period.
“At the end of the third year, the principal of Shs100,000 will be repaid to the investor meaning that the initial investor’s wealth of Shs100,000 has grown in three years to a total of Shs145,000. If the investor kept reinvesting the Shs15,000 every year, his wealth would be even higher at Shs145,000,” she says.
She adds that government securities are highly liquid instruments and attract very competitive interest rates compared to similar products in the market. They are the biggest investment asset in the financial markets compared to company shares, real estate, commercial bank fixed deposits and other assets.
Ms Mugumya further adds that majority of commercial bank assets are largely invested in these attractive government securities. Individuals are picking interest.
Ms Mugumya says: “There are currently more than 12,000 registered investors in the Bank of Uganda Central securities depository system from less than 5,000 investors 10 years ago.”
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