A simple guide to Government Bonds investing in Kenya
A treasury bond (T-bond) is a medium term to long term security issued by the government. They typically pay interest every 6 months until the bond matures. Treasury bonds in Kenya are issued every month.
Who can invest in T-Bond?
Any person/organization with a CDS account with the central bank and a bank account can invest in T-bonds (Please note that this is a separate CDS account from the shares one.)
A CDS account is an account that records the ownership of your securities (bonds/bills in this case) and any of your transaction history whenever you buy or sell them.
Types of Government bonds
1. Fixed coupon bonds- most government bonds are fixed coupon. This means that the interest rate will not change over the life of the bond so the semiannual interest payments from these bonds will stay the same.
Coupon rate is the rate of interest paid by bond issuers on the bond’s face value. It is the periodic rate of interest paid by bond issuers to its purchasers. The coupon rate is calculated on the bond’s face value. A bond’s face value is the amount the issuer provides to the bondholder upon the maturity of the bond.
If you invest in a 10-year bond with a face value of Kshs 100,000 and a coupon rate of 10%, you will earn KShs 5,000 every 6 months. The interest will be charged a 15% Withholding tax, you will therefore receive KShs 4,250 every 6 months.
2. Infrastructure bonds are used by the government for infrastructure projects. These bonds in Kenya attract a lot of market interest because returns from them are tax exempt.
If you invest in a 10-year infrastructure bond with a face value of Kshs 100,000 and a coupon rate of 10%, you will earn KShs 5,000 every 6 months. Unlike the other bonds, your interest will not be subject to Withholding tax and hence you will receive your KShs 5,000 semi-annually.
3. Zero coupon bonds are similar to Treasury bills, in that they are sold at a discount and do not have interest payments. (refer to my note on Tbills). Zero coupon bonds are rarely issued.
How to open a CDS Account.
You open a CDS account for free with the Central Bank in any of its branches in Nairobi, Mombasa, Kisumu, Eldoret or the Currency Centres in Meru, Nakuru, Nyeri and Kisii (recently opened). You will need to fill in the mandate card and provide among other information on the card your bank details. You must have two signatories of your bank certify the information by signing the form. You can go to any branch of your bank for confirmation, not necessarily your branch.
· You can complete the application process in one day but it can be long if you do not have all the required documentation with you. Please see the link for what you require https://www.centralbank.go.ke/securities/treasury-bonds/
· CBK working hours are 8:45am to 2:00pm Monday-Friday
· Normally your CDS account will be processed within 7 days (There has been some delays recently due to the effect of the COVID-19 pandemic limiting the number of staff going to the office)
· Once your CDS account is ready, you will receive a text message/email from CBK notifying you and also providing you with your account number.
Investing in T-bonds
Currently Treasury bonds in Kenya are offered for tenors (number of years) ranging from two years to 30 years.
You can investment by buying bonds in the primary market or the secondary market. Primary market refers to new issuance or reopening by the Government while buying in the secondary market involves buying bonds that are already listed at NSE. (This is a similar concept to buying shares during the IPO and buying shares already listed at the NSE. Primary bond market is the IPO)
Treasury bonds are auctioned monthly, the Central Bank publishes the prospectus which gives information on the offer size, coupon rate, period of sale, issuance method, how to bid, the auction date etc. (I have attached a prospectus for bonds on offer in January, the 2-year issuance period has already lapsed, the infrastructure bond is still on issue until 19th January).
You can find the bonds on offer, and the auction results on this link; https://www.centralbank.go.ke/bills-bonds/treasury-bonds/
The minimum amount one can invest in is Kshs 50,000 for the Fixed coupon bond and KShs 100,000 for the infrastructure bond. Secondary market trading (at the NSE) is in multiples of KShs 50,000.00.
If you do not wish to open a CDS account with the Central Bank, you can still invest in Treasury Bond through your commercial bank but in most cases at a fee. Some banks (I have seen Standard Chartered) have also introduced avenues/services where they offer the bonds to their customers.
Kenyans living abroad can invest in government securities as long as they have an active Kenyan bank account. They can open a CDS account and submit all required forms to the Central Bank via email.
Submitting your bid
Recently CBK has introduced Treasury Money Direct where you can place your orders through your mobile phone (previously you were required to submit physical bids to CBK).
There are 2 ways to invest; competitive and non-competitive bids.
· In the competitive bidding you indicate the rate you are willing to take for the money you are lending. If you are investing more than KShs 20 million, you have to do a competitive bidding.
· In the non-competitive bidding you accept the average rate of the accepted bids.
On the auction day, the Central Bank’s Auction Management Committee (AMC) meets and, after considering all received bids, determines the cut-off rate they are willing to accept. For competitive bidding, bids within the cut-off rate are accepted while those above the rate are rejected. If you chose to take the uncompetitive bid, you will get the average rate of all the accepted bids.
Once the auction is complete, you will receive an SMS or email from CBK notifying you of the results of your bid, typically by the next day.
If successful, they will give you the amount you need to pay, the reference number and by when you should pay; usually by the next Monday (unless it is a public holiday). It is there key to ensure you have the money in your account before deciding to apply for the bond.
CBK accepts cheques for amounts below KShs 1 million. For amounts above 1millon you will be required to do a bank transfer. You will transfer the amount to your CBK account the same way you do with other bank transfers. Successful applicants who fail to submit payments within the payment period may be barred from future investment in government securities.
Interest (coupon) on Treasury bonds is typically paid semi-annually. The published prospectus gives the dates when the interest will be paid until the maturity of the bond. Interest will be credited to your bank account on the specified dates.
Receiving back your money.
Upon maturity, the investor will receive the last interest amount and the face value of the Bond which will be credited to the bank account indicated when opening the CDS account. You may however choose to give roll-over instructions to CBK to purchase another upcoming bond with your proceeds.
1. Investing in T-bonds has little or no default risk at all (Governments rarely default).
2. Investing in T-bonds provides a determinable stream of income (you are almost guaranteed of receiving your interest every 6 months)
3. Safer investment compared to equities-Treasury bonds are attractive to risk averse investors who prefer lower risk assets.
4. Treasury bonds in Kenya are listed on the NSE and hence provide an exit mechanism if one needs to sell their bond before maturity.
5. In normal circumstances, treasury bonds offer a higher return than treasury bills.
6. In Kenya there exist long term bonds (up to 30 years) that can allow one to invest for longer term objectives e.g. retirement, children education
7. Infrastructure bonds are exempt from withholding tax hence increasing return.
8. T-bonds are auctioned monthly making them an available investment option that can allow one to build a portfolio that pays them interest even monthly.
1. Treasury bonds are not capital protected. This means that their price at the NSE can go up and down and hence if you want to sell your bond before maturity and the prices have gone down, you may receive less than what you invested.
2. Long-term investment: You might have to wait up to 30 years for the bond to mature if for example you have bought the 30-year bond and do not want to sell it.
3. They require a minimum investment of KShs 50,000 for Fixed coupon and KShs 100,000 for infrastructure bonds which can be high for some investors.
4. The bonds trade in multiples of KShs 50,000 on the secondary market (NSE). This means you cannot buy or sell less than 50,000 and anything more than that can only be in multiples of 50,000 i.e. next is 100K, 150K, 200K.etc
5. The interest rate is based on demand and supply, when the Government has less demand or the supply from investors is high, this can reduce the rate of interest offered.
Finally here is the link to the January 2021 Government Bonds Prospectus
https://www.centralbank.go.ke/uploa…-2021-2 AND IFB1-2021-16 DATED 25-01-2021.pdf