29 Questions you need to know about (Treasury Bills and Bonds)

Questions and Answers: 

1. What are Kenyan Treasury Bills?  

Kenyan Treasury Bills (T-Bills) are short-term government securities issued by the Central Bank of Kenya on behalf of the National Treasury. They are typically issued with maturities of 91, 182, and 364 days and are used to help manage the country’s short-term funding needs.

2. How do Treasury Bills work? 

Investors purchase T-Bills at a discounted price; they receive the face value upon maturity. The difference between the purchase price and the maturity value is the investor's return.

3. Who can invest in Treasury Bills?

Both individual and institutional investors can invest in Kenyan T-Bills. This includes citizens, residents, and foreign investors.

4. What is the minimum investment for Treasury Bills?

The minimum investment for Treasury Bills in Kenya is Ksh 100,000.

5. How are T-Bills issued?

T-Bills are issued through an auction process held by the Central Bank of Kenya. Investors can place bids electronically through their banks, and the bids are accepted based on yield and amount.

6. Can Treasury Bills be traded on the Nairobi Securities Exchange as collateral? 

Treasury Bills aren't traded on the Nairobi Securities Exchange but can be used as collateral for loans and transferred among CDS account holders. Treasury bonds, backed by the government's credit, are highly secure and may also serve as collateral for loans, although some lenders may prefer them over corporate bonds due to their safety. 

7.What are the implications if I decide to sell a bond before its maturity date?

Withdrawing from a bond investment before its maturity date may result in potential financial consequences, such as receiving a lower return than anticipated or incurring transaction fees. Additionally, market conditions at the time of sale could impact the selling price of the bond.

8.Are the returns from bonds or bills better than what we get from a Sacco?

The returns from bonds or bills may vary depending on market conditions and the specific terms of the investment. It's essential to compare the potential returns offered by bonds or bills with those provided by a Sacco to determine which option may be more beneficial based on individual financial goals and risk tolerance.

9.Is it possible to invest in both bills and bonds simultaneously?

Yes, it's possible to invest in both bills and bonds at the same time. Investors can diversify their portfolio by allocating funds to both types of securities. Additionally, investors have the flexibility to invest different amounts in bonds or bills based on their financial goals and preferences.

Investors have the option to diversify their investment portfolio by simultaneously investing in both Treasury bills and Treasury bonds. Furthermore, they can tailor their investments by allocating varying amounts to bonds or bills based on their financial objectives and risk tolerance.

10. How is the interest on Treasury bills calculated?

Interest is calculated based on the difference between the purchase price and the face value of the bill. The yield is determined at the auction and varies based on market demand.

11. Are Treasury Bills safe investments?

Yes, T-Bills are considered low-risk investments since they are backed by the government of Kenya. The likelihood of default is very low, making them a secure option for investors.

12. How can I buy Treasury Bills?  

Investors can buy T-Bills through banks or financial institutions that are approved by the Central Bank of Kenya. They can also invest directly through the CBK’s digital platforms.

13. What are the tax implications for Treasury Bill investments? 

The interest earned from T-Bills is subject to a withholding tax, which is currently set at 15% for individuals. It's important to consult a tax advisor for specifics regarding individual circumstances.

14. Can Treasury bills be sold before maturity? 

Yes, T-Bills can be sold in the secondary market before maturity. However, the selling price will depend on prevailing market conditions and interest rates.

15. What is the primary purpose of issuing Treasury Bills? 

Treasury Bills are issued to help the government finance its short-term budgetary needs, manage liquidity in the economy, and serve as a tool for monetary policy implementation.

16. How often are Treasury Bills auctioned?

Treasury Bills are auctioned regularly, typically every week. The Central Bank of Kenya publishes a calendar of the auction dates.

17. What are the risks associated with investing in Treasury Bills? 

While T-Bills are considered low-risk, they are still subject to interest rate risk, meaning if interest rates rise, the value of existing T-Bills might decrease if sold before maturity. However, default risk is negligible since they are government-backed.

18. Can foreign investors buy Kenyan Treasury bills?

Yes, foreign investors can invest in Kenyan Treasury Bills, although they must comply with regulatory requirements set by the Central Bank of Kenya.

19. What role does the Central Bank of Kenya play in Treasury Bills?

The Central Bank of Kenya is responsible for issuing, managing, and conducting auctions for Treasury Bills. It also oversees the implementation of monetary policy using these instruments.

20. How are interest rates on Treasury Bills determined? 

Interest rates, or yields, on T-Bills are determined through the bidding process during the auctions, influenced by demand, market conditions, and prevailing interest rates in the economy.

21. Can I invest in T-Bills through a broking firm?

Yes, many broking firms facilitate the purchase of Treasury bills on behalf of investors. Ensure the firm is registered with the Central Bank of Kenya.

22. What happens at maturity? 

At maturity, the government pays the face value of the T-Bill to the holder. Interest has already been earned, given that T-Bills are purchased at a discount.

23. How do I track the performance of my Treasury Bill investment? 

Investors can track their investments through the Central Bank of Kenya’s online platforms or via their banking institutions that facilitate the investments.

24. What are competitive vs. non-competitive bids in T-Bill auctions?

In competitive bids, investors specify the yield they are willing to accept, while in non-competitive bids, investors accept the average yield determined by the auction. Non-competitive bids guarantee acquisition of T-Bills as long as they do not exceed the total amount being issued.*

25. Can T-Bill investments contribute to my retirement savings? 

Yes, T-Bills can be a good component of a conservative investment strategy for retirement savings, as they provide steady, albeit modest, returns with low risk.

26. What are the liquidity options for T-Bills? 

T-Bills can be liquidated before maturity through the secondary market. Investors can sell their T-Bills to other buyers, though prices may fluctuate based on current market conditions.

27. Are there any fees associated with buying or selling Treasury bills? 

While there may be no fees from the government, banks or brokers may charge service fees for processing transactions related to T-Bills.

28. Can I hold Treasury Bills in a specific type of account? 

Yes, T-Bills can be held in various accounts, including individual investment accounts or retirement accounts, depending on the financial institution's policies.

29. How does inflation affect Treasury bills?

Inflation can erode the real return on Treasury bills. If inflation rises significantly, the purchasing power of the returns may decline, which investors should consider when evaluating T-Bill investments.

Introduction to Treasury Bonds

 

 

Introduction to Treasury  Bonds 

A Treasury bond, also known as a T-bond, is a government-issued security with a medium to long-term maturity. Typically, they pay interest every six months until the bond reaches maturity.In Kenya, Treasury bonds are issued on a monthly basis.

• CDS Account Creation. To invest in a bond, you first need to open a Central Depository System (CDS) account with the Central Bank of Kenya. Then, you'll need to fill out a separate application form for the specific bond you wish to purchase.The government advertises any bonds it is issuing in daily newspapers and on the Central Bank website.

• Lower Risk Bonds are considered safe investments, so the expectation isn't to double your money overnight. Bonds offer lower risk compared to other investments, which results in lower returns.For example, 

The last two-year bond issued in February carries a coupon rate of 12.8%. This is likely higher than the interest your Ksh.50,000 savings account would earn.Bonds can provide a stable source of income and are useful for retirement planning.Many individuals looking to preserve a portion of their retirement savings while generating income for daily expenses choose to invest in bonds.

For instance, if you have Ksh.10 million in your bank account at retirement or currently, investing it in bonds could yield Ksh.1.28 million annually, translating to Ksh.100,000 per month. Meanwhile, the initial Ksh.10 investment remains intact, with you living off the generated income.

• Treasury Bonds Overview:Treasury Bonds differ from Treasury Bills in their duration and investment avenues.Duration: Treasury Bonds are issued for longer periods, ranging from 1 year to 30 years. Currently, Kenya offers bonds with tenors from 2 years to 30 years.

• Investment Channels: Primary Market: Investors can participate in new issuances or reopenings by the Government. Secondary Market: Bonds already listed at the Nairobi Securities Exchange (NSE) can be purchased. This is akin to buying shares during an IPO versus buying shares already listed at the NSE.Auction Frequency:  Treasury Bonds are auctioned monthly. The Central Bank publishes a prospectus detailing offer size, coupon rate, sale period, auction date, etc.

• Investment Requirements:The minimum investment is Ksh.50,000 for Fixed Coupon Bonds and Ksh.100,000 for Infrastructure Bonds.In the secondary market (NSE), trading occurs in multiples of Ksh.50,000.Investment Accessibility:Investors can invest directly through their commercial bank, although fees may apply. Some banks, such as Standard Chartered, offer bond investment services to their customers.Kenyans living abroad can invest in government securities if they maintain an active Kenyan bank account. They can open a CDS account and submit required forms to the Central Bank via email.

In summary, Treasury Bonds offer longer-term investment opportunities compared to Treasury Bills and can be accessed through both primary and secondary markets, as well as via commercial banks, making them accessible to a broader range of investors, including those living abroad.

 

Type of Government Bonds 

• Fixed Coupon Bonds: Imagine you lend money to someone, and they promise to give you a certain amount of candy every week. With fixed coupon bonds, it's like that. The person borrowing money from you promises to give you the same amount of candy every week until they give you back all the money you lent them.
• Coupon Rate: This is like the special candy deal you get when you lend money. Let's say you lend Ksh.100 to your friend, and they promise to give you 10 candies every week. That's the coupon rate – how many candies you get for every Ksh.100 you lend.
• Infrastructure Bonds: These are special bonds that help build things like roads and schools. When you lend money for these projects, the government doesn't take away any candies from what they promised to give you. You get to keep all the candies they promised.
• Zero Coupon Bonds: These are a bit like magic candy. Instead of getting candies every week, you buy a special magic candy that doesn't give you any candies until the very end. But when you finally get it, it's a big, tasty treat!Investment Eligibility: If you have a special account at the bank and some candies saved up, you can help the government by lending them your candies. It's like putting your candies to work to help make good things happen.

Competitive vs Non-Competitive Bids

Submitting Your Bid:With CBK's Treasury Money Direct, bids can now be submitted conveniently through mobile phones, replacing the need for physical bids.

Two Ways to Invest:

• Competitive Bidding: For investments over Ksh.20 million, investors indicate the rate they're willing to accept.
• Non-Competitive Bidding: Investors accept the average rate of accepted bids.

Auction Process:

• On auction day, the Auction Management Committee (AMC) reviews all bids and sets a cut-off rate.
• For competitive bids, those within the cut-off rate are accepted, while those above are rejected.Non-competitive bidders receive the average rate of accepted bids.

Notification and Payment:

• Successful bidders receive notification from CBK via SMS or email by the next day.
• Payment details, including the amount, reference number, and payment deadline (typically by the next Monday), are provided.Payments below Ksh.1 million can be made via cheque, while bank transfers are required for amounts above 1 million.

Interest Payments:

• Treasury bond interest (coupon) is paid semi-annually, with dates specified in the prospectus.Interest is credited directly to the investor's bank account on these dates.

Receiving Your Investment:

• Upon maturity, investors receive the final interest payment along with the face value of the bond.Proceeds are credited to the bank account linked to the CDS account used for investment.Investors may opt to reinvest by providing roll-over instructions to CBK for future bond purchases.

How Treasury Bills Work in Kenya:

 How T-Bills Work in Kenya:

• T-Bills are sold at a discount to their face value and redeemed at face value upon maturity.For example, a Ksh.100,000 T-Bill might be sold for Ksh.90,000. At maturity, the investor receives the full Ksh.100,000.The return is subject to a 15% withholding tax.
• Auction Frequency:T-Bills are auctioned by the Central Bank of Kenya on a weekly basis.Purpose of Government Issuing T-Bills:The government issues T-Bills to raise funds for various projects, which is part of its domestic borrowing strategy.
• In summary, while both Treasury Bills and Treasury Bonds offer fixed returns, they differ in terms of their structure, investment duration, and frequency of issuance. Treasury Bills are typically for short-term financing, while Treasury Bonds are for longer-term projects