Treasury Bills in Kenya: What They Are and How They Work

A lot of people are looking to invest in treasury bills in Kenya. There is a good reason for this; they are secure, short-term, and offer attractive interest rates. 

However, understanding what treasury bills are or how they work is often an issue for most new investors. Understandably, these investment instruments can be complicated and there’s not a lot of information to go on. 

Lucky for you, I did plenty of research and wrote this guide to help you understand everything you need to know about Treasury bills in Kenya. You will learn what they are, how they work, their risks and benefits, and how you can start investing. 

What are Treasury Bills in Kenya? 

Treasury Bills, often referred to as T-Bills, represent short-term debt instruments issued by the Kenyan government. These financial instruments serve as a means for the government to raise funds to meet its short-term financing needs, such as covering budget deficits or funding public projects

Imagine you lend some money to the government, and they promise to pay you back with extra money after a short period, typically 91 days, 182 days, or 364 days.

Here’s the simple part: You don’t get interest payments along the way, like with a regular savings account. Instead, the government pays you back more than you lent them when the T-Bill matures. This extra amount is your earnings, and it’s the difference between what you paid for the T-Bill and what it’s worth when it’s due.

The issuer of T-Bills in Kenya is the government itself, making them one of the safest forms of investment in the country. The Kenyan government has a strong track record of meeting its debt obligations, further enhancing the appeal of T-Bills to investors seeking safety and stability in their investments.

How Do Treasury Bills Work in Kenya?

Treasury Bills (T-Bills) allow investors like you to lend money to the Kenyan government for a specified period, typically 91 days, 182 days, or 364 days, in exchange for a guaranteed return. 

Here’s how they work in more detail:

• Issuance Process:
  • The Kenyan government holds auctions each week to sell T-Bills to raise funds for its short-term financial needs.
  • These auctions are open to both individuals and institutional investors.
• Investor Participation:
  • To invest in T-Bills, you need to have a Central Bank of Kenya (CBK) Custodial Account, which you can open through a commercial bank.
  • Once you have the account, you can place bids in T-Bill auctions.
• Bidding Process:
  • You specify the amount you want to invest and the maturity period (That is, 91 days, 182 days, or 364 days) in your bid.
  • The bidding process is competitive, with investors offering different interest rates they are willing to accept.
• Auction Results:
  • After the auction, the government determines the highest interest rates it will pay to investors, starting with the lowest bid and working upwards.
  • If your bid matches or is below the accepted interest rate, you’ll receive the T-Bills at the rate you bid.
• Calculation of Returns:
  • T-Bills are sold at a discount to their face value. Your return is the difference between the face value and the discounted purchase price.
  • For example, if you buy a 91-day T-Bill with a face value of Ksh 100,000 for Ksh 98,000, your return will be Ksh 2,000 when the T-Bill matures.
• Maturity and Payment:
  • When the T-Bill matures (after 91, 182, or 364 days, depending on the type), the government pays you the full face value of the T-Bill.
  • This face value represents the original amount you invested plus your earnings.
• Taxation:
  • The interest income earned from T-Bills is subject to taxation, so you need to account for this when calculating your overall return.

How You Make Money With Treasury Bills in Kenya 

Usually, you make money with Treasury Bills (T-Bills) through a process called discounting. Here’s how it works:

• Purchasing T-Bills at a Discount: When you buy a T-Bill, you pay less than its face value. This discounted purchase price is typically determined through an auction where investors submit bids specifying the amount they want to invest and the yield (interest rate) they are willing to accept. The government accepts bids starting with the lowest yield and works its way up until the entire issuance is covered. The bid price you specify represents the amount you’re willing to pay for the T-Bill.
• Holding Period: T-bills have a specified maturity date, which can range from 91 days to 364 days (or even longer in some countries). During this holding period, you do not receive periodic interest payments as you would with a traditional savings account or bond.
• Earning the Yield: The difference between the face value (the amount you will receive when the T-Bill matures) and the discounted purchase price is your earnings, often referred to as the yield. This yield represents the interest you earn on your investment. The yield is effectively your reward for lending money to the government.
• Maturity and Redemption: When the T-Bill matures, the government pays you the full face value of the bill. This amount is fixed and known at the time of purchase, so there is no uncertainty about the return of your principal investment.

Types of Treasury Bills in Kenya 

The government issues Treasury Bills (T-Bills) with various maturity periods, allowing investors to choose the duration that best fits their financial goals. There are typically three main types of T-Bills, each with a different maturity period:

91-Day T-Bills:

• These T-Bills have a maturity period of 91 days, which is approximately three months.
• They are the shortest-term T-Bills available in Kenya.
• 91-Day T-Bills are often favored by investors looking for a very short-term, highly liquid investment option.

182-Day T-Bills:

• 182-day T-Bills have a maturity period of 182 days or approximately six months.
• They offer a slightly longer investment horizon compared to the 91-day T-Bills.
• Investors who want a balance between short-term liquidity and a slightly higher yield may opt for 182-day T-Bills.

364-Day T-Bills:

• These T-Bills have the longest maturity period among the standard offerings in Kenya, with a duration of 364 days, or approximately one year.
• They are suitable for investors with a medium-term investment horizon.
• 364-Day T-Bills often provide a slightly higher yield compared to their shorter-term counterparts.

The government conducts regular auctions for each of these T-Bill types, providing investors with opportunities to purchase them based on their financial preferences and investment goals. You can choose to invest in one or a combination of these T-Bill types to build a diversified portfolio that meets your needs.

Why the Government Issues T-Bills 

The government of Kenya issues Treasury Bills (T-Bills) for several important reasons:

• Short-Term Financing: T-bills provide a way for the government to raise funds quickly to meet its short-term financing needs. These needs can include covering budget deficits, funding essential public services, or addressing unexpected expenditures. 
• Budget Management: T-bills help the government manage its cash flow and maintain fiscal discipline. By issuing T-Bills, the government can bridge temporary gaps between revenue collection and spending requirements without resorting to long-term borrowing, which can have higher costs and long-term implications.
• Control Inflation: T-bills can also help the government control inflation by removing excess money from circulation. When individuals and institutions invest in T-Bills, they are essentially locking up their funds for a specific period. This reduces the amount of money available for immediate spending and can help prevent excessive inflationary pressures.
• Developing the Domestic Debt Market: Issuing T-Bills contributes to the development of the domestic debt market in Kenya. This market includes a wide range of participants, such as banks, financial institutions, and individual investors. By regularly issuing T-Bills, the government fosters a liquid and dynamic market for debt securities, which can attract both domestic and foreign investors.
• Monetary Policy Tool: T-bill issuance can also serve as a monetary policy tool. The Central Bank of Kenya can use T-Bill auctions to influence the money supply and interest rates in the economy. For example, by adjusting the supply of T-Bills, the central bank can help manage interest rates and control inflation.
• Diversification of Government Funding: Relying on a mix of funding sources, including T-Bills, government bonds, and external loans, allows the government to diversify its funding base. This reduces dependence on any single source of financing and mitigates risks associated with changes in interest rates or external economic conditions.

Benefits of Investing in T-bills 

Investing in Treasury Bills (T-Bills) offers several benefits, making them an attractive option for a wide range of investors. Here are the key advantages of investing in T-Bills:

• Safety: T-Bills are considered one of the safest investments available because they are backed by the government. The Kenyan government has a strong track record of meeting its debt obligations, which makes T-Bills virtually risk-free when held to maturity.
• Low Risk: T-Bills are low-risk investments because they have a fixed interest rate, and you know exactly how much you will earn at maturity. There is minimal risk of losing your principal investment, making them suitable for conservative investors.
• Liquidity: T-Bills are highly liquid investments. While they have a fixed term to maturity, you can sell them to other investors who have a CDS account. 
• Competitive Returns: Although T-Bills are low-risk, they typically offer competitive interest rates compared to other low-risk investments like savings accounts. 
• Diversification: T-Bills can be a valuable component of a diversified investment portfolio. They provide stability and can act as a counterbalance to riskier assets, such as stocks or corporate bonds.
• Regular Income: T-Bills can generate a predictable stream of income if you hold them until maturity. You can then use the interest income to supplement your regular cash flow or to meet specific financial goals.
• Ease of Investment: Investing in T-Bills is straightforward and typically involves participating in government-held auctions. It doesn’t require complex financial instruments or strategies, making it accessible for beginners.
• Inflation Hedge: While T-Bills may not offer high returns (since they are low-risk), they can help protect your savings from the erosive effects of inflation. Your earnings, although modest, typically outpace inflation, preserving your purchasing power.

Risks of Investing in T-bills 

While Treasury Bills are generally low-risk investments, they are not entirely without risk. Here are some potential risks associated with T-Bill investments:

• Interest Rate Risk: T-Bills are sensitive to changes in prevailing interest rates. If interest rates rise after you purchase T-Bills, the value of your existing T-Bills may decline. This is because new T-Bills with higher interest rates would be more attractive to investors, leading to a decrease in the market value of older, lower-yielding T-Bills.
• Reinvestment Risk: T-Bills are typically short-term investments, and when they mature, you may need to reinvest the proceeds. If interest rates have declined significantly since you initially invested, you may struggle to find similar investment opportunities that offer the same yield, potentially lowering your future returns.
• Inflation Risk: While T-Bills are low-risk, they may not always keep pace with inflation. The interest earned on T-Bills may not be sufficient to protect your purchasing power if inflation rates are high. In such cases, your real (inflation-adjusted) returns may be negative.
• Opportunity Cost: By investing in T-Bills, you may miss out on potentially higher returns from other, riskier investments, such as stocks or corporate bonds. While T-Bills are a safe haven, they may not be the best choice if you need substantial growth in your investments.

What Is the Difference Between Treasury Bills and Bonds in Kenya?

Treasury Bills (T-Bills) and Treasury Bonds are both government debt instruments in Kenya, but they differ in several key ways:

1. Maturity Period:

• T-Bills: T-Bills have shorter maturity periods, typically ranging from 91 days to 364 days. They are considered short-term debt instruments.
• Treasury Bonds: Treasury Bonds, on the other hand, have longer maturity periods, often extending from 2 years (e.g., 2-year bond) to 30 years (e.g., 30-year bond). They are considered long-term debt instruments.

2. Interest Payments:

• T-Bills: T-Bills are sold at a discount to their face value and do not make periodic interest payments. Investors earn a return by purchasing them at a discount and receiving the full face value at maturity.
• Treasury Bonds: Treasury Bonds pay periodic interest, known as coupon payments, to bondholders. These payments are typically made semi-annually until the bond matures, at which point investors receive the face value of the bond.

3. Investment Horizon:

• T-Bills: T-Bills are suitable for short-term investors who want to park their funds for a few months and earn a return without taking on significant interest rate risk.
• Treasury Bonds: Treasury Bonds are more suitable for long-term investors who are willing to commit their funds for several years or even decades. They provide a predictable stream of income over the life of the bond.

4. Risk and Return:

•  T-Bills: T-Bills are considered lower risk compared to Treasury Bonds. They have minimal interest rate risk and credit risk because they are short-term and backed by the government. However, they offer lower returns compared to bonds.
• Treasury Bonds: Treasury Bonds may offer higher returns than T-Bills but come with slightly higher interest rate risk. Bond prices can fluctuate more in response to changes in market interest rates.

5. Purpose:

•    T-Bills: T-Bills are often used for short-term cash management, meeting liquidity needs, and preserving capital with minimal risk.
•    Treasury Bonds: Treasury Bonds are typically used for long-term financing of government projects, infrastructure development, and other capital expenditures.

Who Can Invest in Treasury Bills in Kenya?

Anyone (individual or corporate entity) can invest in T-bills whether you are a resident or non-resident, as long as you meet the following conditions: 

• You must have an active account at a local commercial bank.
• If you do not possess an account at a local commercial bank you can invest through a commercial bank or investment bank in Kenya, acting as your nominee.
• You must have a CDS (Central Depository System) Account with the Central Bank of Kenya (CBK).
• You must have a minimum investment amount required is Ksh. 100,000, with any additional investments made in multiples of Kshs. 50,000.

If you are a non-Kenyan investor who is not domiciled in Kenya (no permanent residence in Kenya) you have the option to invest in Kenyan Government Treasury Bills through a local commercial bank or investment bank acting as your nominee. However, if you a non-Kenyan investor who is domiciled in Kenya, you can invest directly by creating a CDS account with the Central Bank of Kenya (CBK).

Treasury Bills in Kenya – FAQs