Investing In Treasury Bonds: A Complete Guide For Beginners

Treasury Bonds are medium to long-term secure investment options offered by the government.

Treasury 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). 

There are several types of bonds that are generally made available in Kenya:

• Fixed Coupon Bonds. These are the most common bonds auctioned by the Central Bank. They have a fixed interest rate over the Bond’s life, so semiannual interest payments from these bonds will stay the same.
• Infrastructure Bonds. The government uses infrastructure bonds for specified infrastructure projects. These bonds typically see a lot of market interest because returns from them are tax-exempt.
• Zero-coupon Bonds. These 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.

Investing in Treasury Bonds

Here is a detailed step-by-step guide to help you start investing in Treasury Bonds through the Central Bank of Kenya (CBK).

1. Open a CDS Account

Before investing in Treasury Bonds, you need to have a CDS account with the Central Bank. It is free to open one, and it is how the Central Bank keeps track of who holds which government securities.

To open a CDS account, you must have a bank account with a Kenyan commercial bank. You also need to collect a mandate card from the CBK and fill it out in block letters. 

You will need to fill in your contact information and information about your commercial bank account on the mandate card. You’ll also need to have two signatories from your bank sign the card to verify the information you’ve provided.

When submitting your mandate card, you’ll need to submit a passport-sized photograph of yourself, which must be certified and stamped by a representative from your commercial Bank.

Finally, you’ll also need to submit a clear copy of your National Identity Card, passport, or alien certificate.

2. Decide How You Want to Invest

Treasury Bonds are offered for a set amount of years, ranging from 1 to 30 years. 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.

When you are ready to invest, you should monitor the upcoming bond prospectuses 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 receive every 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, and how much taxation the returns are subject to.

For more popular Bonds, you might also find information about amortization. 

When the government expects a bond to 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 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 amount you want to invest. 

You will also need to fill in your personal information, CDS account number, commercial bank account number, and whether your investment funds come from a local or offshore source.

You have two options for selecting a rate on the application form: the percentage of your face value investment that you will receive in semi-annual 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 who choose 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 determines the Non-Competitive/Average Rate investors will receive using an average of those rates. 

The final section on the application form is the Rollover Instructions. To easily facilitate re-investment, investors with maturing Bonds can use their returns to purchase additional government securities. 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 2 pm on the Tuesday of the last week of the Bond’s sale period.

4. Getting the Auction Results

The Central Bank’s Auction Management Committee (AMC) meets at 4 pm on auction days. After considering all received bids, the committee 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 through Treasury Mobile Direct (TMD), Twitter, and in the statistics section of the CBK website. 

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 how much they owe for their Treasury Bonds. 

5. Payment

The payment period for an auction typically closes on the following Monday at 2 pm. 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. one 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 semi-annually in their commercial bank account as indicated on the CDS account throughout the tenor of the Bond. 

When the Bond matures, the investor will receive the last interest amount and the Bond’s face value. 

Alternatively, investors may choose to roll over their security into a new forthcoming issue. In this case, they have to complete the application form giving rollover instructions and submit it to Central Bank before the closure of the sale period 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 the investor’s account but instead sends only refunds amounts generated from new investment.

Final Note

Treasury Bonds are among the most secure mid-long term investment with a good return. They are great investments for investors seeking to diversify their investment portfolios. They are especially great for those close to retiring and who need a predictable income source during their retirement.

In the next part of the series, we will examine how the Treasury Bond secondary market works.