ALEX KAKANDE: Investing in Treasury Bonds: Secondary market challenges

Last week, I was involved in a treasury bond purchase transaction that highlighted the lengths some players in the treasury bond market are willing to go to maintain their old ways.

A client approached me on Thursday, expressing their desire to invest nearly UGX 300 million in a bond. Leveraging my network of reliable contacts, I was able to secure a 20-year treasury bond with a 16.4 percent yield, settlement on Friday, August 9th, 2024. On that date, the client would only need to pay UGX 300 million, with the potential to receive a bond valued at UGX 322 million (A discount of around UGX 22.5 Million would yield to the client right away).

The agreement was in place for all the parties involved, the purchase form completed, and ready for submission to the custodian bank. To protect the confidentiality of those who assisted us in resolving this matter, I have chosen not to disclose the bank’s identity. However, I feel it’s important to share this experience to educate others on the intricacies of treasury bond investments and the importance of seeking professional investment advice. The deal we secured meant that the client would enjoy a UGX 22.4 million discount on their investment, which was an excellent opportunity. We had locked in the rate the day before, ensuring that regardless of market fluctuations on Friday, the transaction was guaranteed. Indeed, by Friday, August 9th, interest rates had fallen below our secured rate.

When the client visited the bank branch, they were met with a perplexing and frustrating situation. Initially, the bank offered a 15.8% yield on the same bond, which would have resulted in a bond worth only UGX 310 million for the same investment—a loss of approximately UGX 13 million in value. We immediately rejected this offer, insisting that the bank honor the original deal without attempting to renegotiate by just processing the transaction as required by the Secondary Market practice. The process was fraught with delays, as the front office person was slow to process the paperwork and forward it to the relevant department (Something we think it might have been deliberate). The client had arrived at the branch around midday, but due to unnecessary delays and attempts to sell a less favorable bond, the transaction was not completed until the market closed at 3 PM.

Over the weekend, a few calls made to the a few individuals that intervened from the Bank’s side to see why this had happened, unrelenting to us, we want the deal honored because we did everything on our part in the right way but someone was strong bent to frustrate the deal. Persistence paid off, and by yesterday, the bank agreed to process the deal at the agreed terms, allowing the client to secure their bond at a favorable price, with a 16.4% yield compared to the 15.8% initially offered by the bank saving a good UGX 12.4 Million. This experience underscores the value of having an investment advisor, particularly for transactions over UGX 50 million. While advisors do charge a fee—ranging from 500,000 plus per transaction—the savings they can secure for you, often in the millions, far outweigh the cost. Last week alone, I negotiated on behalf of four different clients, and each time banks attempted to renegotiate terms unsuccessfully because the deal we had from third parties was way much better than what some big institutions could offer.

If you’re considering investing a significant sum in treasury bonds, I strongly advise seeking the expertise of an investment advisor. If you don’t have one, feel free to reach out to me; if I can’t assist, I will recommend someone who can. An advisor can negotiate on your behalf, guide you on where to invest, and help you secure the best possible deal, potentially saving or earning you more money than you might realize. The challenges we faced last week with this particular deal serve as a testament to the benefits of having an advisor who is willing to stand firm on your behalf. For those with substantial funds to invest in the treasury bond market, securing an investment advisor is crucial. There are many skilled advisors available who will prioritize your interests and strive to secure the most advantageous deals for you.

Happy Investing Everyone

Alex Kakande is a financial analyst