How to make money from treasury bonds in Kenya

In this article, we will explain the whole process of How to make money from treasury bonds in Kenya.

We set up the foundation of Treasury bonds meaning, how you earn these treasury bonds, the interests, the types of treasury bonds and everything about treasury bonds.

Treasury bonds meaning

Treasury bonds means that the government issues debt securities to you, the investor.

Technically, you’re lending money to the government by purchasing a bond at an agreed interest rate.

In turn, the government will pay you a fixed interest rate for a set duration of time.

The authorized issuer owes the investor a debt, and then the issuer upon paying back pays the interest on the debt.

In Kenya, the issuer is The Central Bank Of Kenya (CBK).

Types of Treasury Bonds

These bonds differ in the purpose they serve and the structure of the interest rates.

Below are the types:

1. Treasury Notes

These mature within 2-10 years and pay interest every six months.

They are normally sold in premium, coupon or at a discount hence the interest could be equal to, greater than or less than the face value of the note.

2. Treasury Bills

T bills mature within 4-52 weeks.

Unlike the treasury notes, they are only sold at a discount. this means you as an investor can buy one for a price below its face value.

In the end, you get to receive the full face value plus the interest.

3. Treasury Inflation-protected Securities (TIPS)

They mature within 5-30 years and interest is paid within every six months.

They are considered the best since they increase with inflation and decrease with deflation.

This means that your investment will be protected against inflation.

4. Floating-rate notes (FRNs)

FRNs mature in 2 years and the interest is paid in 3 months.

The interest payment rises or falls depending on the discount rates.

They are sold at discounts, coupons or discounts.

5. Separate Trading of Registered Interest and Principal of Securities (STRIPS)

These are available through private financial institutions.

The firm starts by taking an eligible Treasury note, bond, or TIPS, and separating the coupons (interest payments) from the principal.

It then sells the pieces to investors at steep discount prices. Investors can then redeem the security for full face value at maturity.

How to apply for treasury bonds

Below is a step-by-step guide to investing in treasury bonds through the Central bank or any other private financial institution;

Step 1: Meeting the requirements

There are requirements you ought to meet before investing in treasury bonds

Have a copy of your passport photograph
Original National ID, passport or alien passport.
Have a bank account in Kenya

Step 2: Visit the Central Bank of Kenya (CBK)

Visit the nearest CBK branch to open a CDS (Central Depository System) account with the Central Bank of Kenya.

This account serves as a record of government securities ownership

This account will allow you to participate in treasury bond trading.

Step 3: Fill Out the Mandate Card

Obtain a mandate card from the Central Bank and ensure that you complete it in clear block letters.

The mandate card requires you to provide your contact information and details regarding your commercial bank account.

Step 4: Visit your Bank for Verification

Take the filled mandate card to the bank for verification, from here the bank appends its stamp and signatures of two authorized signatories. This step satisfies the CBK’s requirement of having a bank account with the specified bank.

Step 5: Submit the Documents to CBK

Return to the CBK and submit the verified mandate card along with the required documents such as a coloured passport-sized photo of yourself, certified and stamped by a representative from your bank.

Fill out the email indemnity agreement which requires a witness and submit a clear copy of your KRA PIN, your national ID, passport or alien certificate.

You may also be required to register for CBK-Treasury Mobile Direct (TMD).

This will allow you to access specific mobile services on government securities via the USSD *866#.

The CBK will then process your application within approximately one to two weeks.

Step 6: Start the Bond Trading Journey

Once the CDS account is open, you are ready to dive into treasury bond trading. This means you can actively participate in auctions and transactions to buy treasury bonds.

Treasury Bonds interest rates in Kenya

The coupon Treasury bonds interest rates of interest are determined by CBK and they vary depending on how desperate the government needs funds.

Also, the prevailing interest rates and the tenor of the bond play a key role in determining the rate of interest.

Most treasury bonds interest give between 11% and 14% in interest paid semi-annually.

Why treasury bonds are better than saving/investing in banks or SACCOS

Safety for your Savings: They are considered to have little or practically no risk attached to them. All things being equal, you will get your money back with the promised interest.
Returns are predictable over time: During turbulent times in the stock market bonds and T-bonds are known to remain relatively stable.
High-Interest Income: T-bonds have a higher rate of interest compared to saving accounts in Banks.
Diversifying Your Investment: Investing in Bonds and T-Bills can be the best way of not putting your eggs in a single basket.

Risks involved when investing in treasury bonds

Treasury Bonds are considered safe investments however some of the risks involved include:

Interest rate risk: Interest rates and bond prices are inversely related. Should interest rates rise, the price of your bond will tend to fall (and vice versa). The longer the time to maturity of a bond, the greater the interest rate risk.
Liquidity risk: This is the risk of having to sell a bond at discounted prices due to the lack of a ready market or buyer.
Sovereign risk: Payment of the Treasury bond may be affected by the political and economic events in the country.

Conclusion

In conclusion, treasury bonds means are the closest thing to risk-free Investments.

They are reliable more than SACCOS since they diversify anyone’s financial holdings hence balancing the financial stock.

Before you begin investing on treasury bonds, know the treasury bond meaning.

FAQs

1. Minimum amount to invest in treasury bonds in Kenya

The minimum face value purchase for Treasury bills and bonds is KES 50,000.00 for non-competitive bids and KES 2,000,000.00 for competitive bids and must be invested in denominations of KES. 50,000.00.

2. How much does a 1-year treasury bond pay?

1 Year Treasury bonds interest Rate is at 4.98%, compared to 5.01% the previous market day and 4.38% last year. This is higher than the long-term average of 2.94%.