An Introduction to Treasury Bills And Bonds

Any wealth generation activity in business is characterized by opportunity risks. Many investors have had to deal with information overload on investment options and in the process, some ended up making costly investments at minimal guaranteed returns. 

For this reason, this article focuses on providing reliable insight and a breakdown into treasury bonds and bills trade as one of the most secure investment options with regular returns and flexibility. 

Understanding Treasury Bills And Bonds

Treasury Bills

Treasury Bills or T-Bills are units through which the government borrows from the local market, offering investors a chance to make returns at very assured attractive rates.

They are short-term investments that have a maturity period of 91, 182, or 365 day periods. This means that as an investor, you will receive your returns on investment within 3, 6, or 12 months.

The government auctions the bills weekly through the Central Bank of Kenya. You can invest in treasury bills through a commercial or investment bank if you hold an account(s) with the respective institutions. 

Commercial or Investment banks can also invest in treasury bills directly through the Central Bank. Presently, the least amount you need as an investor to buy T-Bills is Ksh 100,000.

Treasury Bonds

Unlike the short-term T-Bills, the Treasury bonds or T-Bonds are medium to long-term secure investment options offered by the government. 

The T-Bonds pay interest every six months till maturity. Upon maturity, the investor or owner is paid an amount equivalent to the principal investment (the original amount invested). 

Most T-Bonds have a fixed interest rate throughout the tenure of the bond. This gives an investor the ability to predict the returns throughout the bond life as a long-term income source. 

Individuals and businesses can invest in T-Bonds as an applicant of a commercial bank or investment bank in Kenya, but if you as an investor hold a bank account with a local commercial bank, you can as well invest directly through the Central Bank, with the least investment amount being Ksh 50,000.

Risks of Investing In T-Bills And T-Bonds

Investing in T-Bills and T-Bonds is a great way to generate short-term, medium-term, or long-term income besides being one of the safest ways to invest compared to stocks. 

Nevertheless, investors need to be aware of the opportunity or unforeseen risks that can impact the return on investment on the two. 

Below are some of the main risks involved in treasury trades in bonds and bills:

Realized Loss 

Although T-Bills and T-Bonds can be traded before their maturity period, an investor ought to know that the price received for selling either a T-Bills and T-Bonds may be lower than the initial purchase price of the T-Bills and T-Bonds. 

For instance, if either of the two was bought for Ksh 1 Million and was sold before its maturity, the investor might receive Ksh 0.95M in the treasury financial market. 

Investors are only assured the principal investment amount if they hold the T-Bills and T-Bonds until maturity.

Inflation and Bond Term

When you buy a T-Bill or T-Bond or both, you commit to getting a rate of return, for the duration of the investment. But if inflation and the cost of living increase radically, and at a rate faster than income investment, investors will see their buying power wear down, and they may essentially achieve a negative rate of return on the investment when factoring in inflation. 

For instance, suppose an investor earns a 5 % rate of return. If inflation grows at 6% after the T-Bill or T-Bond purchase, the investor’s actual rate of return is -1% due to the decrease in purchasing power.

Find out more about how inflation affects your investments here.

Bond Prices and Coupon (Interest) Rate Risk

An investor needs to know the inverse relationship between the two. When there is a fall in the coupon rates, the T-Bill and T-Bond prices rise due to high uptakes. On the other hand, when interest rates rise, bond prices tend to fall because of low uptake. 

This occurs because when coupon rates are on the fall, investors try to lock or capture in the highest rates they can as long as possible. To do this, they will buy existing bonds that pay a higher interest rate than the prevailing market rate. This rise in demand results in an increase in bond prices and vice versa.

Final Note

Treasury Bonds and Bills are one of the most secure investments with a good return in the short, mid and long term.

They are great investments for those who are in or close to retirement or any investor seeking to diversify their investment portfolio while earning a stable return.

In the next part of the series, we will walk you through how to invest in Treasury Bills through the Central Bank of Kenya.