What to Look for When Investing in Government Bonds
Part 13/15: A Beginner’s Guide to Investing in Treasury Bonds & Bills
How to Evaluate a Government Bond Before Investing
Government bonds are a popular choice for investors seeking stable returns with lower risk. However, not all bonds are the same—some offer higher yields, better liquidity, or tax advantages.
Before you invest, it’s important to assess key factors to ensure the bond aligns with your financial goals. Here’s what to look for when evaluating government bonds in Uganda, Kenya, and other African markets.
Key Factors to Consider Before Investing in Government Bonds
Interest Rate (Coupon Rate)
What It Is: The fixed or floating interest paid to bondholders over the bond’s life.
Why It Matters: A higher coupon rate means more periodic income, but returns should be compared against inflation and alternative investments.
Example:
Uganda’s 20-Year Treasury Bond (2023) offers a 16% coupon rate, one of the highest in East Africa.
Kenya’s 19-Year Infrastructure Bond (IFB1/2023/19) offers 14.399% tax-free, making it attractive for local investors.
Tip: Compare different bond rates and maturities before choosing where to invest.
Bond Maturity & Liquidity
What It Is: The time until the bond reaches maturity and the government repays your principal.
Why It Matters:
Short-term bonds (1-3 years) give faster access to capital but lower returns.
Long-term bonds (15+ years) offer higher yields but require patience.
Liquidity also matters—Can you sell the bond before maturity? Some bonds trade actively in the secondary market, while others are illiquid.
Example:
Uganda’s 20-Year Bond is great for long-term investors.
Kenya’s 364-day Treasury Bill is ideal for those who need short-term liquidity.
Tip: If you may need cash before maturity, invest in actively traded bonds.
Inflation & Real Returns
What It Is: Inflation affects the purchasing power of future bond payments.
Why It Matters: If a bond offers 12% interest, but inflation is 9%, your real return is only 3%.
Example:
Uganda (2023): Inflation averaged 5.3%, while long-term bonds paid 15-16%, ensuring positive real returns.
Ghana (2023): Inflation surged above 30%, making low-yielding bonds unattractive.
Tip: Always check if a bond’s return is higher than inflation to protect your investment value.
Taxation & Incentives
What It Is: Some government bonds offer tax exemptions, increasing net returns.
Why It Matters: A 14% tax-free bond might yield better net returns than a 16% taxable bond.
Example:
Kenya’s Infrastructure Bonds (IFBs) are tax-free, making them more attractive than regular bonds.
Uganda’s standard bonds are subject to withholding tax, reducing net income.
Tip: Prioritize tax-free bonds when available, especially for high-net-worth investors.
Government Stability & Credit Risk
What It Is: The risk of a government defaulting on bond payments.
Why It Matters:
A stable government ensures timely interest and principal payments.
Countries with high debt or financial instability may struggle to meet bond obligations.
Example:
Ghana (2023): Debt restructuring led to losses for bondholders.
Botswana: Holds a AAA credit rating, making its bonds very low-risk.
Tip: Check the country’s credit rating and debt levels before investing in its bonds.
This is part of the series A Beginner’s Guide to Investing in Treasury Bills and Bonds.
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Please do a series on money markets as well 🙏🏿