UAE to open Treasury Bonds to individual investors: A safer way to grow your money

Younis Haji Al Khoori, Undersecretary of the Ministry of Finance, said in a press statement that "the primary aim behind the issuance of treasury bonds is to introduce fresh investment instruments in the market, catering to both investors and individual investors soon," reported Sharjah-based Arabic daily Al Khaleej, yesterday.

The statement further noted how the new initiative will “diversify investment opportunities currently available in the market and seek to offer a broader spectrum of savings options beyond the conventional choices such as real estate, stocks, or bank deposits."

If you, like many others, are looking for better ways to invest your savings, a treasury bond is one such alternative. But what exactly are treasury bonds and how do they work as an investment when offered to individual investors?

Also, what do you get in terms of returns for investing in them, and what role do they play in an economy? Let’s answer these questions by taking a deeper look at this investment option and understand how you can profit from them.

How does a T-Bond work in the UAE?

Simply put, an investor who buys a T-Bond is lending the government money. Like a loan, a bond pays interest periodically and repays the borrowed at a stated time, known as ‘maturity’. By investing in them you are lending your investment money for the duration of the T-Bond.

Let’s say you buy a two-year T-Bond for which you will earn a fixed amount of interest every six months for two years. At the end of the two years, the asset ‘matures’ and your deposit is returned to you — meaning you’ll be left with your initial investment plus interest you earned.

“T-Bonds, like all bonds, provide a predictable income stream as they pay investors interest twice a year. If the bonds are held to maturity, bondholders get back the entire amount plus some, so bonds are a way to preserve investment capital,” explained Anil Pillai, a consumer banking analyst based in the UAE.

“Stocks can also provide income through dividend payments, but dividends tend to be smaller than a bond’s interest payments, and companies make dividend payments at their discretion, while bond issuers are obligated to make payments. But keep in mind that all bonds give lower returns, on average, than stocks.”

How do new investors access T-Bonds?

“While T-Bonds essentially work like Fixed Deposits (FDs), there are a couple of key points you should remember about T-Bonds,” added Pillai. “All T-Bonds have different maturation dates and, as a result, the routine returns or the interest payments you get periodically vary with each.

“Also, not all T-Bonds are traded publicly through exchanges worldwide. In fact, most times, T-Bonds are traded between banks, large brokers, or institutional investors. Individual investors can participate in T-Bond trading through their lender or broker-assigned investment accounts.”

However, Zubair Shakeel, an investment advisor working with a Dubai-based asset manager, explained that "for individuals to directly buy or sell T-Bonds on any given financial market, the bonds will need to first be offered as a tradable market instrument to investors. Only then can T-Bonds be traded on the market by individuals."

When asked how individuals stand to benefit from the latest move to enable access to T-Bonds through financial markets at exchanges, Shakeel added that this "improved access could open individual investors up to investing in T-Bonds through mutual funds, exchange-traded funds, and the likes, depending on what is offered to them."

Interest rates affect T-Bonds: Here’s how

Shakeel added that it’s crucial to know how much a bond’s price will move when interest rates rise or fall, to determine its value. “When interest rates fall – notably, rates on government bonds – older bonds become more valuable and so have higher coupons.

“This is why investors holding older bonds can charge a ‘premium’ to sell them in the financial market. On the other hand, if interest rates rise, older bonds may become less valuable because their coupons are relatively low, and older bonds therefore trade at a ‘discount’."

This is why falling interest rates boost the value of bonds and rising rates may hurt their value in the short-term. However, over the long term, rising interest rates can increase a bond portfolio’s return as the money from maturing bonds is reinvested in bonds with higher yields.

“In the current economic climate, we’ve seen interest rates worldwide climb. As a result of the rate hikes recorded over the past year-and-a-half, these Treasury instruments are producing rates of interest that attract investors,” added Shakeel.

Key takeaways: Why it’s worth investing in T-bonds

If you’re seeking low-risk investments, your first choice should be Treasury securities, given that they are backed by the credit of the government that issues them. This is why such investments, at times known as ‘Treasurys’, are widely considered to be the ‘safest investment’.

“Regardless of which type of security you purchase, the risk to you is quite low if you plan to hold the instruments to maturity. That’s because governments worldwide rarely default on its debt obligations, and the likelihood it will remains low,” added Pillai.

“However, in order to understand which specific Treasury product makes the most sense for you, you need to determine how long you want your money invested and what interest rate these products are offering.”

If the money will be needed in the short term, a T-Bond with shorter maturity might be best, noted Shakeel, while adding that for investors with a longer time horizon, T-Bonds with maturities up to 10 years might be better.

“Typically, the longer the maturity, the higher the return on investment. Moreover, in the current global rate hike environment, you’ll earn more interest from a shorter-term product than a longer-term one.”