At the beginning of 2018 I bought an insurance product called cash builder with Prudential. The objective of the policy was to accumulate funds which I could use to invest in other things down the road. I instructed my bank to automatically deduct ugx 1m at the end of each month and transfer it to Prudential. So for the last four and a half years, this cash has been deducted from my account without fail. This cash had compounded to about ugx 61.8 million at the end of July 2022. I canceled my policy and the funds were sent to my bank account. My insurance agent was quite helpful throughout this process.
I then decided to buy a treasury bond from Bank of Uganda because I had noticed that interest rates were rising. I got two quotations for a 20 year bond from my bank and my broker (Crested Capital). The quotation from my broker was more competitive so I transferred all the cash to them. I instructed my broker to place a bid in the 20 year treasury bond auction which was held early September 2022.
The broker called me recently and sent me a contract note with some good news. My bid was successful and we had obtained a good interest rate of 18.5% per year and the bond was acquired at par. What this means is that this bond will pay me about ugx 10m per year in interest for the next 20 years! After 20 years I will also receive back my principal of ugx 61.8m. In total I will earn about ugx 205 million in net interest from this investment over the next 20 years. Now, I plan to reinvest all the interest in other treasury bills and bonds, which implies that this investment could be worth about ugx 800 million to a billion shillings in 20 years! This doesn’t seem so bad after all and moreover, I don’t have to exert any additional effort. So I am going to earn all this cash without doing any additional work!
What I have done is basically lend money to the government of Uganda. In return the government through Bank of Uganda will pay me ugx 10 million every year or ugx 5m every six months and then pay me back my principal of ugx 61.8m after 20 years. Now, lending the government cash is a fairly safe bet. The government rarely defaults on its loan obligations. The government also has a taxing mandate and as long as the economy grows and the taxing agency is able to collect taxes, I will get paid. It also doesn’t matter whether the government changes; the new government will inherit this obligation.
The tricky thing with long term bonds is the impact of inflation and the potential credit default by the government. Inflation erodes the purchasing power of cash with time. So the ugx 61.8m I will receive in 20 years will buy me less stuff compared with the same amount today. To reduce this erosion of purchasing power, I plan to reinvest all the interest I receive. As long as I invest at rates exceeding inflation I will be able to preserve my purchasing power. Inflation also has another adverse effect. To fight inflation, Bank of Uganda usually increases interest rates. Rising interest rates reduce the value of my bond. If interest rates rise beyond 18.5% I will only be able to sell my bond at prices below ugx 61.8m. The reverse is true. If inflation goes down and interest rates fall, the value of my bond will go up. The real risk is if the economy totally collapses and inflation goes through the roof. If this happens then my bond or any other paper asset including cash held by any Ugandan will be worthless! I hope that this won’t happen in the next 20 years. But in any case I will be able to recover my principal within the first six years of the bond maturity period which further reduces the risk!
There are several advantages with bonds. They are relatively safe and hustle free. I don’t have to deal with all the troubles of running a business or chasing after tenants. The interest from long term treasury bonds is taxed at only 10% withholding tax. Treasury bonds are fairly liquid. If I really need the cash, I can sell my bond and receive the cash within a few days. I can also use the bond as collateral to access a bank loan. The bonds also pay a competitive interest rate. If you have ever run a small business you will testify that trying to earn 18.5% on invested capital is an uphill task. You also don’t need a lot of cash to invest in treasury bonds. Anyone (citizens + foreigners) can invest for as little as ugx 100k. Another key advantage is that I can easily scale up investments in treasury bonds as long as I have the capital. Scaling up in a business or real estate is not so obvious. Treasury bonds also offer an easy way to diversify risk from traditional investments like land, business, rentals, etc.
It is interesting to note that I completed this transaction without physically meeting anyone or handling any physical cash. Everything was transacted online, through email, phone, and WhatsApp. Based on my experience, I would definitely recommend everyone to have a certain portion of their wealth invested in treasury bonds.