Investors are about to get the most long-dated bonds as government borrows more from the public.
The government is to issue Ghana’s first 20-year Treasury Bond. This is the first time the government is issuing such a long-dated bond. The longest that have been in existence is the 15-year bonds. The investment is opened to both residents and non-residents
With the bond’s issuing date in August 2019, the bond matures in 2039.
This is all in a bid to extend the yield curve and lengthen the term of local debt for better debt management. Government may be targeting more institutional investors in pension funds that has the long-term horizons for their funds.
What remains of interest to the investor is the returns which in this case is the coupon rate or simply what is paid back to investors annually. The 15-year bond has a coupon rate of 20% per annum. Therefore, Ghana’s first 20-year bond would be expected to pay something slightly higher.
Benefiting from Investing in Government’s Bond
Investors have the opportunity to snap it from the primary market and sell off on the secondary market somewhere along the line when interest rates decline. When interest rate declines, it gives existing bonds some appreciation in value, therefore existing bond prices increase. The investor could then sell on secondary market at a premium price to glean off the margin as ‘profit’. It therefore gives investors a two-fold benefit of the guaranteed annual coupon payments and the margins on price appreciation of the bond (not guaranteed).
The long-term nature of the bond exposes the investment to a prolonged period of investment risk in an environment as volatile as Ghana’s economy. Investment risk occurs when one receives less returns than expected. In the case of this bond investors are more likely to receive their promised returns (coupons) as government would most likely pay. The risk is therefore low on the side of returns. However, the a good level of risk exist in the price movements of the bond due to the volatility of the economy and the seeming lack of control of the forex risk. Long term projections in such an environment has a wide margin of errors. This is something foreign investors will really look at.
Investors are however expected to seek advise before any such investments.