Investing in Treasury Bills and Bonds

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Article by: Steve Muriithi

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Treasury bills and bonds are the Government‘s way of borrowing money from the public. They are also known as government securities. These investments are regarded as the safest in the industry and are commonly referred to as risk-free assets. This is because it’s widely thought that the government is not likely to default in repaying its debt obligations.

Treasury bills

Treasury bills are also known as T-bills and are short term, typically lasting for one year. They fall in three categories and their classification is based on the number of days they have been issued for. We have the 91 day T-bill, 182 day and 364 day T-bills.

T-bills are offered weekly and are usually advertised every Friday in the daily newspapers. To trade in T-bills, one has to open a Central Depository Securities (CDS) account with the Central Bank of Kenya. One then downloads the forms from the CBK website or accesses them from any CBK branch countrywide. Once filled the forms are dropped in the bid boxes available at the CBK branches. There are no charges to open and maintain this CDs account but one prerequisite is that you should have a bank account.

The proof of investment is a statement sent to you electronically. Physical statements are made available to you every three months and also at your request.

The minimum amount required to start investing in T-bills is Kshs 100,000. This amount is known as the face value, that is the amount you will receive after your investment period. What this means is that, if the value of the treasury bill you are purchasing is Kshs 100,000, and the interest rate is 10%, what you will invest is Kshs 90,000 and then at the end of the period you will be paid Kshs 100,000.

In the month of August 2020, the 91 day, 182 day and 364 day T-bills were offering interest rates at 6.12%, 6.54% and 7.45% respectively. This indicates that the 364-day bill earns more in interest than the others.

Investors may opt to roll over their securities to the next T-bills on offer. To effect this, you would be required to fill in documentation giving instructions for the rollover. One can decide to redeem their T-bills before maturity, although there are penalties, to discourage this.

Treasury bonds

These are medium-term or long term investments. One can walk into any CBK office and request to open a Central Depository Securities (CDS) account with them to purchase a bond. This is a different CDS account from the one required to trade in shares.  You can also open a CBK CDS account through your bank.

Information on T-bonds is available every first or second week in the daily newspapers or listed on the CBK website on a monthly basis.

In Kenya, you can invest with as little as Kshs 3,000 from your phone, on bonds that are being traded on the Nairobi Securities Exchange. It is commonly known as M-Akiba and the USSD code to use is *889#, transaction costs are applied.  When buying the M-Akiba, the CDS account you will need will be opened through your phone, unlike the other bonds where you need to have a CBK CDS account. To purchase a T-bond through your CDS account, you will require a minimum of Kshs 50,000. Interest is paid semi-annually.

Interest rates vary depending on a number of factors which include inflation and prevailing market conditions. In June 2020, a 6-year bond was issued at an interest rate of 10%. Interest will be paid in 12 instalments over the 6-year period. On the last interest payment, the investors will also receive the initial amount they invested. You can choose to roll over your investment after maturity.

Comparison of bonds and bills

For both T-bills and T-bonds, you will require to submit a copy of your identity card and passport photo, along with two signatories of your bankers confirming that you hold a bank account.

You will also be liable to pay a withholding tax of 15% on both T-bonds and T-bills unless you are tax exempt, upon which you will provide the tax exemption certificate.

Both T-bonds and T-bills can be used as security to access credit facilities at financial institutions.

For someone looking to invest their money for a short term, T-bills are the way to go. But if you want to invest in the long run then T-bonds are the better choice. Your investment period will, therefore, determine which option to choose. Keeping in mind that to invest in a T-bond, the minimum amount is Kshs 50, 000 while for T-bills it’s much higher than that.

One of the pros of investing in T-bonds and bills is the assurance of getting back your capital investment and interest. Unlike shares whose price fluctuates, bonds and bills do not fluctuate. T-bills also guarantee a return in a short period, as short as 91 days. Some unit trusts invest in treasury bonds and bills.