Treasury Bonds in Kenya: The Ultimate Guide for 2024

Are you looking for a secure and profitable way to invest your money while contributing to the growth of the Kenyan economy? Well, Treasury Bonds in Kenya are a good option. While many may perceive it as a tricky way to invest due to the misconception of its difficulty, we will look further into it to help you understand it and make an informed decision. Join us as we break it down.

What Are Treasury Bonds in Kenya?

Treasury Bonds are medium to long-term debt securities issued by the Kenyan government to raise funds for various development projects and meet its financial obligations. The tenure for bonds is 1-30 years.

The interest rates incurred are paid after every six months, and the face value invested is returned at the end of the period.

Bonds are considered fixed-income avenues as the investors are assured of regular and fixed returns. In this case, the government borrows or issues a bond, and the investor becomes the bondholder or lender.

The Minimum Deposit for Treasury Bonds in Kenya

To invest in Treasury Bonds in Kenya, you need a minimum deposit amount, typically set by the Central Bank of Kenya (CBK).

The minimum investment amount for Treasury Bonds in Kenya was usually Ksh 50,000. However, this amount may change over time, so checking with the CBK or your financial institution for the most up-to-date requirements is crucial.

How to Purchase Treasury Bonds in Kenya

Here is the process of purchasing treasury bonds in Kenya:

1. Opening a CDS account

Opening a Central Depository System (CDS) account is the first step towards acquiring treasury bonds. This account is important as it helps the Central Bank keep track of individuals or corporate bodies holding government securities. It acts as a repository for your bonds, allowing you to hold, trade, and receive interest payments electronically.

To begin opening a CDS account, having an active bank account with a Kenyan commercial bank is a must. You’ll also need to obtain a mandate card from the Central bank or one of its affiliated branches.

Information to be provided includes your contact details and comprehensive data about your commercial bank account. You should fill it in block letters. To ensure authenticity, two authorized signatories from your commercial bank must endorse the card.

When submitting the mandate card, you should have your passport-sized photograph stamped and verified by your commercial bank. Moreover, you’ll need your identification card or passport.

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2. Choose your investment path

The duration of treasury bonds is offered for a set period of 1-30 years; hence, you’ll need to decide the one you’ll invest in. When making this decision, consider its availability in the upcoming auctions, as shown on the CBK website. The generally available bonds include:

  • Fixed Coupon Treasury Bonds: These are the most common treasury bonds issued by the Kenyan government. Fixed coupon bonds pay a regular, predetermined interest (coupon) to bondholders at fixed intervals (usually semi-annually) until maturity. The principal amount is repaid at maturity. These bonds are also known as fixed-rate bonds.
  • Zero Coupon Treasury Bonds: Zero coupon bonds do not pay periodic interest or coupons. Instead, they are issued at a discount to their face value and mature at par. Investors receive their returns by purchasing the bond at a lower price than its face value and receiving the face value at maturity. The difference between the purchase price and the face value represents the investor’s interest earnings.
  • Infrastructure Bonds: Infrastructure bonds are a type of fixed coupon bond specifically issued to finance infrastructure projects in Kenya. The government uses the proceeds from these bonds to fund the construction, maintenance, or development of critical infrastructure, such as roads, bridges, and energy projects. Investors receive regular interest payments and get their principal back at maturity.

3. Fill out and submit the application form

After choosing an available bond, you need to download an application form and complete it. The form requires you to fill in information about:

  • Your type of bond
  • Issue number
  • Face value you intend to invest
  • Duration
  • Bond roll-over (this is an option of whether you’ll roll over the bond upon maturity or get back the face value)
  • Personal information, including name, CDS account number, telephone number, rate, and source of investment funds, whether offshore or local.

Ensure you correctly fill in your information and submit your application to the CBK office or branches. Ensure this is done by 2 p.m. on the Tuesday occurring during the final week of the bond’s sale period.

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4. Get the Auction Results

The Central Bank, through the Auction Management Committee, meets to make a market-determined rate from the weighted average of successful bids. The results are then published on the CBK statistics section, Twitter, and the Treasury Mobile Direct (TMD). It’s worth noting that although you’ll receive bonds from the amount you invested, sometimes it may be lower.

After the auction, you should contact us to know whether your application was accepted. The Treasury bonds have high demand due to their risk-free and high-return nature. You can be accepted or rejected based on the amounts and interest rates.

If successful, contact the central bank to know your payment. You’ll be required to pay the following Monday by 2 p.m.

5. Making payment

To make payments, you need a notification of acceptance, which directs your payment time, the reference number, and the amount. For payment below 1 million, you’ll use a banker’s cheque or bank transfer and KEPSS transfer for amounts larger than Ksh 1 million.

If a person doesn’t pay within the set time, they are barred from future transactions with government security.

6. Maturity proceeds

Investors are entitled to a semiannual interest payment into their bank account for the bond duration indicated in the CDS account. Upon maturity, you’ll receive the face value and the last interest payment. Otherwise, you may roll over your security to a forthcoming investment. In this case, you’ll need to fill in an application form with rollover directions and submit it to the central bank before the end of the sale period of your bond.

The Interest Rate on Kenya Treasury Bonds

The interest rate on Kenya Treasury Bonds can vary depending on the bond’s tenor and prevailing market conditions.

According to the Central Bank of Kenya, the interest rate for treasury bonds is 10.50%, last reviewed in June 2023. As of 9 0ctober 2023, the Kenyan 10-year treasury bond yielded 16.799%.

When you invest, you’ll get charged a standard withholding tax of 15% for bonds of a duration of 9 years and below and 10% for bonds of 10 years and more. However, individuals with tax-exemption certificates are excluded from the tax payment. For infrastructure bonds, interest and discount earnings do not attract taxes as defined in the KRA Act.

Bonds with shorter tenors generally offer lower rates than longer tenors. You should closely monitor the market and the Central Bank’s announcements to stay informed about the latest interest rates for Treasury Bonds.

The Benefits of Treasury Bonds in Kenya

  • Safety and Security: Treasury bonds are considered one of the safest investments available because they are backed by the full faith and credit of the Kenyan government. This means that the government is unlikely to default on its bond payments.
  • Regular Income: When you invest in Treasury bonds, you receive interest payments (coupon payments) semi-annually. This can provide you with a steady and predictable income stream.
  • Diversification: Treasury bonds can be a valuable addition to a diversified investment portfolio. They can provide stability and balance to a portfolio that includes riskier assets like stocks.
  • Long-Term Investment: Treasury bonds typically have maturities ranging from 2 to 30 years, allowing investors to choose bonds that match their investment horizon and financial goals.
  • Capital Preservation: Due to their low-risk nature, Treasury bonds can help preserve your capital. This is especially important for investors who prioritize the safety of their principal.
  • Inflation Hedge: While not a perfect hedge, Treasury bonds can provide some protection against inflation because the interest payments are usually fixed, and the principal amount is returned at maturity.

Treasury bonds in Kenya represent a valuable investment vehicle that promotes financial security and economic development. With the government’s commitment to fiscal responsibility and the continued development of the financial market, these bonds will likely remain a vital component of Kenya’s investment landscape in the future.

Who Can Buy Treasury Bonds?

Anyone can buy treasury bonds, including individuals or corporations. The key requirement for buying treasury bonds in Kenya is having a CDS account, which is required for any government security investment.

Other requirements include identification documents, the minimum amount, and a passport-size photo.

Where Should I Buy Treasury Bonds?

You can buy treasury bonds from the Central Bank of Kenya directly if you have a commercial bank account. This service is accessible through mobile USSD or the treasury mobile direct (TMD).

Also, you may buy the bonds through licensed investment advisors, commercial banks, non-bank financial institutions, and licensed stock brokers. For safety and reduced costs, avoid middlemen.

What Is the Difference Between Treasury Bonds and Bills?

Treasury bonds are medium to long-term investments providing stable returns until the bond’s maturity. On the other hand, treasury bills are short-term without interest payments within the given duration. The interest is given at maturity.

They also differ in the minimum investment deposit rate. For treasury bonds, it is Ksh 50000, while treasury bills are Ksh. 100,000.