Treasury Bonds & Bills

 

 

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.

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

• 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.

How to Invest in goverment bonds

On matters investments, the stock market often takes the spotlight, with its tales of quick wealth and overnight success. However, bonds offer a different appeal, known for their stability and security, making them a staple in many investors' portfolios.

• Bonds provide a reliable income stream, often paying interest semi-annually. Holding a bond until maturity ensures the return of the principal amount, making them attractive for capital preservation.
• Investing in bonds can offer a steady income even before maturity through interest payments. Many retirees choose bonds to secure a portion of their portfolio while generating income to cover daily expenses. For example, investing Ksh.10 million in bonds could yield Ksh.1.28 million annually, providing a substantial monthly income without touching the initial investment. Treasury bonds (T-bonds), backed by the Kenyan government, offer a reliable option for investors nearing retirement or seeking stable returns.
• Bonds, including T-bonds, function as debt securities issued by entities like corporations and governments to raise capital. Investors receive fixed interest payments periodically until the bond matures, at which point they get back their principal investment.
• T-Bonds: Longer-term loans, repaid over 1 to 30 years unlike T-Bills: Short-term loans, repaid in 91, 182, or 364 days

How to Invest 

• Open an account with the Central Bank or a bank, then bid for securities in auctions. 

• T-Bills: Short-term investments, mature in 91, 182, or 364 days.T-Bonds: Medium- to long-term investments, mature in 1 to 30 years.Both are secure investments managed by the Central Bank, offering consistent returns over time. 

• T-Bills: Auctioned weekly, offer competitive returns (10% to 12%) for investments starting at around Ksh.100,000. Interest is paid upon maturity. 

• T-Bonds: Auctioned monthly, provide semi-annual interest payments, and are usually tax-free.

 Who Can Invest: 

• Anyone over 18 with a Kenyan bank account can invest directly or through a bank. 

• M-Akiba: Introduced in 2015, allows investments from as low as Ksh.3,000, making government securities accessible to more people.

 Investment Process 

• Open an account with the Central Bank or a commercial bank, then bid for securities through auctions. Interest is paid upon maturity.T-Bonds: Auctioned monthly, provide semi-annual  Anyone over 18 with a Kenyan bank account can invest directly or through a bank.

In summary, bonds particularly T-bonds, can be an attractive option for those seeking a steady income stream and capital preservation in their investment portfolio.

Competitive Versus 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.