Treasury bonds are a secure, medium- to long-term investment that typically offer you interest payments every six months throughout the bond’s maturity. The Central Bank auctions Treasury bonds on a monthly basis, but offers a variety of bonds throughout the year, so prospective investors should regularly check for upcoming auctions. Most Treasury bonds in Kenya are fixed rate, meaning that the interest rate determined at auction is locked in for the entire life of the bond.
This makes Treasury bonds a predictable, long-term source of income. The National Treasury also occasionally issues tax-exempt infrastructure bonds, a very attractive investment. Individuals and corporate bodies can invest in Treasury bonds as a nominee of a commercial bank or investment bank in Kenya, but if you hold a bank account with a local commercial bank you can also invest directly through the Central Bank and avoid additional fees.
Why invest in Treasury Bonds
Here are some of the reasons why you should consider investing in Treasury bonds.
a. Secure
Treasury bonds are units of government debt, meaning that you are investing in the Kenyan government.
b. Regular returns
Most Treasury bonds carry semi-annual interest payments, allowing investors to receive returns every six months.
c. Flexibility
The Central Bank auctions several different types of Treasury bonds, enabling investors to find bonds that fit their needs.
d. Auctioned monthly
Treasury bonds are auctioned every month, providing ample investment opportunities for diverse financial needs.
How to invest in Treasury Bonds
Follow this step-by-step guide to invest in Treasury bonds through the Central Bank.
1. Open a CDS account
The first step to investing in Treasury bonds is to open a CDS account with the Central Bank. It is free to open these accounts, which are how the Central Bank keeps track of who holds which government securities. Once you have your CDS account, which can be opened for an individual or a corporate body, you can invest in multiple Treasury bills and bonds, so you only need to complete this step the first time you’re investing. You can find sample mandate cards here.
2. Decide how you want to invest
Treasury bonds are offered for a set amount of years, ranging, to date, from one to 30. When choosing a bond to invest in, you’ll need to consider what is available in the upcoming auction and how long of a commitment you want to make. There are several types of bonds that are generally made available:
- Most bonds auctioned by the Central Bank are fixed coupon Treasury bonds, which means that the interest rate associated with the bond will not change over the bond’s life, so semiannual interest payments from these bonds will stay the same.
- Infrastructure bonds are used by the government for specified infrastructure projects. These bonds typically see a lot of market interest because returns from them are tax exempt.
- Zero coupon bonds are similar to Treasury bills, in that they are sold at a discount and do not have interest payments. They are also typically issued for a short period of time.
When you are ready to invest, you should begin monitoring the upcoming bond prospectuses, found here, to find the right opportunity for you. In the prospectus, you will find information about the different bonds on offer, including the bonds’ durations until maturity, or tenor, and the coupon rates. The coupon rate refers to the interest payments you will receive each six months.
They can either be determined in the prospectus, which is typical for longer tenors, or be market determined. You will also find information in the prospectus about when investors will receive interest payments and the final redemption payment, as well as how much taxation the returns are subject to. For more popular loans, you might also find information about amortization.
When the government expects that a bond will result in significant investment, it will use amortization to reduce its burden when the bonds mature. Amortization means that instead of paying investors back in one lump sum at the end of the bond’s tenor, the Treasury pays portions of the bond back throughout its life. After these portions have been paid back to investors, they receive smaller interest payments as the amount of their money held with the Treasury has been reduced.
3. Complete and submit an application form
When you are ready to invest, you need to complete a Treasury bond application form. This includes information about the Treasury bond you want to purchase, like the issue number, the duration, and the face value amount you want to invest. It also includes information about yourself, including your names, telephone number, CDS account number, commercial bank account number, and whether the funds you are investing are coming from a local or offshore source.
On the application form, you have two options for selecting a rate, which is the percentage of your face value investment that you will receive in semiannual interest payments. If the bond has a pre-determined coupon rate in the prospectus, you should choose Non-Competitive/Average Rate. If the prospectus says that the coupon rate is market determined, you can select either the Interest/Competitive Rate or the Non-Competitive/Average Rate.
Investors choosing the Interest/Competitive Rate bid on the bonds by submitting the coupon rates they would like to have for that bond. The Central Bank then decides what bids it will accept and, using an average of those rates, determines what rate the Non-Competitive/Average Rate investors will receive. The final section on the application form is the Rollover Instructions.
To easily facilitate re-investment, investors with maturing bills and bonds can use their returns to purchase further government securities. You can find a sample Treasury Bond Application Form here. The bond prospectus will include the dates of the bond’s sale period. You must submit your application form to the Central Bank’s head office or one of its branches by 2pm on the Tuesday of the last week of the bond’s sale period.
4. Get the auction results
The Central Bank’s Auction Management Committee (AMC) meets at 4pm on auction days and, after considering all received bids, determines the cut-off rate and the weighted average of the accepted bids for market-determined coupon rate bonds. The results from the auction are published, both in a daily newspaper and in the Central Bank statistics section. While investors will typically receive Treasury bonds in the amount they applied for, the Central Bank can issue bonds in a lower amount.
Following the auction, investors need to call or visit the Central Bank or its branches to determine if their applications were successful and to determine how much they owe for their Treasury bonds. If you have submitted an application, it is extremely important that you contact the Central Bank to determine what your payment will be, as you will need to make that payment by 2pm on the following Monday or, if that Monday is a public holiday, the following Tuesday.
5. Payment
The payment period for an auction typically closes on the following Monday at 2pm. Investors can submit their payments, in the amounts specified when they contact the Central Bank, through cash or banker’s cheques for amounts under Ksh 1 million and through a KEPSS transfer for larger amounts. Successful applicants who fail to submit payments within the payment period can be barred from future investment in government securities.
6. Maturity proceeds
Upon investment in a Treasury bond, the investor will receive interest payment semiannually in their commercial bank account as indicated on the CDS account throughout the tenor of the bond. On maturity, the investor will receive the last interest amount and the face value of the bond. Alternatively, investors may choose to rollover their security into a new forthcoming issue and in this case, they have to complete the application form giving rollover instructions and submit it to Central Bank, before closure of the period of sale for that bond.
The maturity date of the maturing security (investment) and the value date of the new bond must match for the rollover instruction to be successful. The bank, therefore, does not remit face value into investor’s account but rather sends only refunds amounts generated from new investment.
