Navigating the Secondary Treasury Bond Market in Uganda: A Cautionary Tale for New Investors
January 10, 2023
This Monday, I got to know about a new investor purchasing a treasury bond in the secondary market. Here's how it looked:
On December 22, 2023, this new investor acquired a 20-year Treasury bond UG12L1408420, at an astounding cost of UGX 143 Million in the secondary market. The bond, having a face value of UGX 109.4 Million with an 18.5% coupon, cost him a premium of approximately UGX 33 Million. On the surface, the purchase appeared to be lucrative as our investor was taking hold of a bond with the highest coupon rate of 18.5%. However, with a purchase price of UGX 143 Million, his yield got down to just around 14.52%, essentially paying UGX 130 for each unit of Bond A.
Now, what the investor didn't know was, the Bank of Uganda was about to open the same type of bond just five days later, on December 27. This primary market re-opened bond had an interest rate of 15% and a better return - around 15.99%.
So, looking at the bond bought on December 22, it would give them about UGX 9.1 Million every six months - over 20 years this would lead to total earnings of UGX 455 Million and UGX 312 Million in pure profit.
Net Cashflow of the Purchased 18.5% Coupon Bond.
However, had he possessed well-rounded advice and had waited a mere week for Bond B to appear on December 27, 2023 (Primary Auction), with the same UGX 143 Million, he could have bought a bond with a face value of UGX 142 Million. This bond would give him UGX 9.6 Million every six months, resulting in UGX 525 Million in total revenues and an impressive profit of UGX 383 Million — UGX 70 Million more than the Bond A he bought on December 22, 2023.
Net Cashflow of the potential 15% 20 year Bond.
When we introduce the factor of compounding into the mix, Bond B would now yield him UGX 9.6 Million versus Bond A's UGX 9.1 Million — which results in an extra UGX 500K for every six months or UGX 1 Million per year. Reinvesting this UGX 1 Million annually for 20 years at an average rate of 14% would result in Bond B yielding an extra UGX 120 Million over Bond A — a total profit of a staggering UGX 200 Million plus all lost because of the this bond bought on December 22, 2023.
This striking contrast highlights the importance of strategic advice in investing, particularly for those doing so for the very first time in the treasury bond market.
Alex Kakande
I honestly get where you are coming from and I do not know much about bonds. But I was wondering how could he have known BOU would be putting up other bonds for sale that were similar to the one he had bought and would give him a higher return at the end of the day?...does the bank have a publication someone can follow or so where it is displayed within which periods certain bonds will be put up on the market?...like on a quarterly basis for instance...or is this more or less insider information one has to obtain and in which case wouldn't this be unethical?
Very informative article!