Treasury Bonds Vs. Bills: A Guide to investing in treasuries in Kenya

Treasury bonds and bills are types of government debt securities issued to citizens to raise funds for various government projects and expenses.?

What is the Difference between a treasury bond and a treasury bill?

A bond is a medium- to long-term government borrowing instrument that usually provides a stable and reliable investment option, ensuring regular interest payments until the bond reaches maturity. Conversely, a bill is a short-term debt sold at a significantly discounted price, thus allowing the investor to make returns at an agreed-upon face value higher than the initial cost.

What To Know Before Investing in Treasuries

Minimum Investment Amount: The least amount of money you can invest in a Kenyan Treasury bond is KES 50,000, while the least you can invest in a bill is KES 100,000.?

CDS Account: To invest in Treasury bonds and bills, one must open a Central Depository System (CDS) account through the Central Bank of Kenya, a licensed stockbroker or investment bank. This account allows you to hold and trade government securities electronically.

Interest Rate: Treasury bonds have fixed predetermined interest rates and maturity dates, making them a relatively safe investment option. On the other hand, treasury bills are sold at a discount, allowing investors to select the face value they will receive when the bill matures and acquire it at a price lower than that chosen amount.

Investment Monitoring: One must keep track of their investments periodically and stay informed about any updates or announcements from the Kenyan government or the relevant authorities.

Maturity Dates: Treasury bonds are long-term; they mature within one year to 30 years, depending on the type of bond. However, that of bills is 91, 182, and 364 days.

Payments: While bonds are usually issued by the Central Bank of Kenya (CBK) every month, the interest payments are made bi-annually throughout the bond's maturity. As for the treasury bills, they mature in less than a year; hence the returns are paid out within three, six, or 12 months.

How To invest in Treasury Bills and Bonds

In Kenya, individuals and corporate entities have the option to invest in Treasury bonds either as a nominee of a commercial bank or investment bank in Kenya. However, if you maintain a bank account with a local commercial bank, you can invest directly through the Central Bank to avoid additional fees.

Here's a guide on how to invest in Treasury bonds in Kenya through CBK:

Open a CDS Account: Begin by opening a CDS account with the Central Bank, which helps track ownership of government securities. To do this, one needs a Kenyan commercial bank account. Obtain a mandate card from the Central Bank or its branches and fill it out with accurate details, including contact information and your commercial bank account data. Furthermore, the investor must have two authorized signatures from their bank to verify the information. Additionally, submit identification documents - certified passport-sized of the investor and a clear copy of their National Identity Card, passport, or alien certificate.

Select investment of choice: Treasuries have different durations depending on whether they are bills or bonds. Investors should consider the available bonds and bills in the upcoming auction and choose one that aligns with their investment goals. Therefore, review the treasury prospectuses for details on investment opportunities such as tenor, coupon rates, interest payment schedules, redemption, and taxation. For example, some bonds are tax-exempt, making them a desirable investment.?

Registration:

1. When ready to invest, complete a Treasury bond application form.
2. Provide information about the bond of choice, such as issue number, duration, and face value amount.
3. Include personal details, CDS account number, commercial bank account number, and the source of investment funds.
4. Depending on the bond's prospectus, choose either the Non-Competitive/Average Rate or Interest/Competitive Rate options for the coupon rate selection.

Auction Results: The Central Bank's Auction Management Committee (AMC) reviews all bids and determines the cut-off rate and weighted average for market-determined coupon rate bonds during the 4 pm auction. Auction results are published through Treasury Mobile Direct (TMD), Twitter, and the CBK website's statistics section. Successful applicants must contact the Central Bank to confirm their acceptance and payment details, which must be made by 2 pm on the following Monday (or Tuesday if Monday is a public holiday).

Payment: Submit the specified payment amount by the deadline through cash, banker's cheques (for amounts under KES 1 million), or a KEPSS transfer (for larger amounts). Failure to make payment within the specified period may lead to future investment restrictions.

Maturity Proceeds: After investing in treasuries, interest payments are sent to the investor's commercial bank account as indicated in their CDS account throughout the investment's tenor. Upon a bond's maturity, the investor receives the final interest amount and the face value of the bond. Investors can also choose to rollover their investments into a forthcoming issue. To do so, a complete rollover instruction application form should be filled out and submitted to the CBK before the sale period for the new bond closes. For a successful rollover, the maturity date of the maturing security and the value date of the new bond must match. The Central Bank will refund only the amounts generated from the new investment, not your account's face value.

Always remember that investing in any financial instrument carries some level of risk, and it's essential to understand the risks and rewards associated with Treasury bonds and bills before making any investment decisions. It's advisable to seek advice from a qualified financial advisor to tailor your investment strategy according to your financial goals and risk tolerance.