In the current volatile economy where businesses are closing down, inflation is off the charts, and the currency is losing value, finding an investment asset you can invest in can be daunting. Although there are no investments where you are guaranteed the safety of your money and a return, some investments are likely to hold the turbulent waters more than others. One of these investments is Treasury bonds.
In this article, we explore the benefits of investing in Treasury bonds.
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Investing is a function of risk mitigation management and resulting returns. As an investor, you are looking at a place where you can put your money, have the least possible risk of losing the money, and still have the highest possible returns.
Treasury bonds are among government securities that are considered low-risk investments. They are considered low-risk because the government backs them.
Here is how they work.
The government needs money to run its services and projects. Therefore, the government resorts to borrowing from its citizens. It borrows through treasury bonds and bills.
If you buy Treasury bonds, you give the government your money. You agree that they will hold your money for a certain period, ranging from one year to 30 years. With this time, you will earn interest from your investment bi-annually. The interest rate is fixed at the beginning of the agreement and does not change.
How does this make your investment low-risk?
The government is the institution of last resort. The only way you could lose your investment is if a government collapses or the government defaults on their loans. If the government whose bonds you buy are stable, it is unlikely to default on their loans.
However, in Africa recently, we have seen governments such as Ethiopia and Ghana default on their international debts, which has rocked their ability to access debt and has resulted in domestic investors having to feel the brunt of the effects.
Kenya is also trying its best to manage its debt, with a Eurobond maturing in June.
There is no zero-risk investment.
There is no zero-risk investment. There is a possibility of a loss while investing in Treasury bonds. Suppose it gets to a point where investors are losing money by investing in Treasury bonds. In that case, the economy is in shambles, meaning that most other investment options within the same economy are also making losses.
Treasury bonds offer fixed interest payments. Having a predictable earning asset is assuring to the investors. With most investments, you can never tell if you will make money, but with Treasury bonds, you are assured that after every six months, you will get a cheque from the interest your money has earned you.
The rate of interest is set at the beginning of the investment. Therefore, you will know how much money you are set to receive from the Central Bank every six months.
This is a very stable investment. It does not require active management, has decent returns, and is low risk.
However, you need to pay attention to inflation rates before investing in a Treasury bond. Since the interest payment is fixed, if the inflation rate grows faster, it will likely eat into your returns. When calculating your risk exposure, factoring in the inflation rate is advisable.
After your bond tenor is over, you get back your principal.
Your principal is the money you locked in with the Central Bank at the beginning of the investment. Before bond maturity, you only get paid the interest on your principal. The government keeps the principal until the bond matures. The principal gets paid back together with the last interest payment.
This is a great way to lock in your money. Your money is not at risk of being stolen or swindled.
Moreover, you can roll over your investment after a bond's maturity. Instead of the government depositing the principal amount into your account, they use the same money and sign you up for another bond.
To do this, you have to write to the Central Bank expressing your desire to roll over your principal before the current bond matures.
Treasury bonds are accessible to individuals. If you have a bank with a local commercial bank, then you can invest in treasury bonds through your bank.
However, the least amount you can invest in Treasury bonds is Ksh50,000.
Nonetheless, it is an investment tool that individual investors can take advantage of.
Treasury bonds are a great asset to diversify your portfolio. A diversified portfolio is much more stable. Hence, Treasury bonds provide this stability.
You can diversify by investing in different Treasury bonds. The government releases several bonds a year that you can participate in to have your money spread. You can also participate in tap sales, where the government reopens certain bonds for willing investors.
Treasury bonds also provide you with liquidity when needed.
If you have a bond and you want to liquidate it, you can trade it at the Nairobi Stock Exchange (NSE). The ability to trade your bond at the NSE makes Treasury bond investments very practical. You now do not have to be worried about being locked in for 30 years without a way out.
If you fail to secure someone to take the bond off your hands and the NSE, the Central bank can buy the bond from you. However, if the Central Bank buys the bond from you, they do so at punitive rates that might result in you making a loss.
Nevertheless, if you really need to liquidate, there is a way.
Treasury bonds do stack up against other investments. They are low-risk and predictable. You get your money back at the end of the investment period, and you can diversify your portfolio and be liquid if needed. These are all tenets of a great investment. However, you must personally assess the investment before committing your money.