We caught up with Johnson Nderi, our Head of Corporate Finance & Advisory at ABC Capital to break down for us how Treasury bills and bonds work.

1. What are T-Bills and T-bonds and what is the difference?

Treasury Bills and Treasury bonds are securities through which the government borrows from the public. Treasury Bills are short term securities at issue and usually have tenors of 91, 182 or 364 days. Treasury bonds on the other hand are medium- to long-term investment that typically offers you interest payments every six months throughout the bond’s maturity.

• What is the risk profile of T-bills and T-bonds?

These are the least risky investment instruments as credit risk is the lowest possible by any entity. Indeed, in finance they are considered risk free. However, they are exposed to inflation risk and risk of loss of capital. Long tenors of T-bills and T-bonds are exposed to higher inflation risk and higher capital erosion risks.

• How do they work?

The borrowing organizations e.g. the national government, corporate entity, issues a T-bond or T-bill. The borrower promises to pay the bond back at an agreed-upon date. Until then, the borrower makes agreed-upon interest payments to the bondholder.

The borrower repays the principal, called the face value, when the bond matures. Most bondholders resell them before they mature at the end of the loan period. They can only do this because there is a secondary market for bonds. Bonds are either publicly traded on exchanges or sold privately between a broker and the creditor. Since they can be resold, the value of a bond rises and falls until it matures.

• Who can invest in them?

Anyone can invest in a T-bill or T-bond as long as one has;

1. A Central Depository System (CDS) Account with Central Bank of Kenya
   1. The minimum amount required to invest in each issue

• Where do I start?

To invest in Treasury Bills and Bonds, one needs to open a CDS account with Central Bank of Kenya. You do this by completing and signing a securities account opening/maintenance form with your Central Depository Agent such as ABC Capital Ltd .

Once one has done this, one can buy these instruments in one of two ways:

1. Through the auctions. These are always advertised in the daily newspapers and the Central Bank website when CBK is issuing them on behalf of Government of Kenya.
   1. Through the secondary market where the investor can buy from another investor who holds some securities which he wishes to sell

• How do I know which T-bills or bonds to choose?

ABC Capital is a licensed stockbroker and has professionals who can guide investors who wish to buy or sell T-Bonds and/or T-bills. Our ABC Bank custodial team helps customers to buy, hold and sell bills and bonds.

• What is the advantage of investing in T-Bills and T-Bonds?
  • These are liquid low risk investments that can yield one returns based on a desired investment horizon.
  • Holders of these instruments can also use them to borrow whenever they require funding.
  • Treasury bonds have regular predictable payments (coupons) that allow one to smooth over their cash flows.

• What are the disadvantages or what do I need to be aware of when investing in T-Bills and Bonds?

a)   Yields are generally low relative to potential yields of other investments

b)   Treasuries offer no inflation protection

c)   Early redemption might mean paying a penalty through a haircut. A haircut is when bond isn’t paid at face value but rather, at a discount of the face value.

• What kind of returns can one expect from T-Bills and Bonds at the moment?

Below is the latest yield curve that shows returns for Government of Kenya bonds listed on the Nairobi Stock Exchange. (These will still be subject to withholding taxes so these are gross yields)

*These rates are valid as at Jan 31, 2022

Want to learn more? Talk to us today via talk2us@abcthebank.com or +254 701 700 700.

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