If you have ever wondered how you can start investing in Treasury bonds, then this article is for you.

Why Does the Government Issue Bonds?

Kenya, like any other government, is obliged to outsource funds to finance its projects and other operations.

One of the most common ways is through borrowing. This can either be external debt or internal debt.

Bonds make up their internal borrowing.

What Are Government Bonds?

Government securities are debt management obligations of the Kenyan government that individuals and organizations can invest in.

Simply put, when you invest in government securities, you lend the government money for a set period.

Types of Government Securities

There are two types of government securities.

1. Treasury Bills

These are short-term debt obligations. They have maturity dates of 3 to 12 months.

The minimum capital required to start is Sh 100,000

2. Treasury Bonds

These are long-term debt obligations. They have maturity dates of 2-30 years. The minimum investment is Ksh 50,000 for regular bonds and Ksh 100,000 for Infrastructure bonds.

In other words, treasury bonds are a secure, medium to long-term investment that offers you interest payments every six months throughout the bond’s maturity.

Advantages of Investing in Bonds

Higher Interest Rates Compared to Banks’ Savings & Fixed Deposit Accounts

Most Treasury Bonds fetch interest rates between 10-13% depending on maturity dates and the market conditions.

This is significantly higher compared to bank savings and fixed deposit accounts.

This is also higher than what Money Market Funds offer, as MMFs have interest rates of 7-10%.

This makes treasury bonds attractive to investors as they fetch higher returns than other asset classes.

Almost Guaranteed Returns

The Kenyan Government has no history of loan defaults. This means that it has always met its debt obligations in the past.

As a result, this makes investing in government securities less risky compared to investing in any other asset class.

Regular Returns

Bonds carry semi-annual interest payments; hence investors receive returns every six months.

Hence an investor who has invested in a couple of bonds can receive interest payments almost every month of the year and boost his cash flows.

Infrastructure Bonds Are Tax Free

Infrastructure bonds are debt obligations used mainly by the government to finance infrastructure projects.

They often have long-term maturity dates of 20-30 years and are tax-free.

This means that the returns from infrastructure bonds are exempted from the 15% withholding tax that is subjected to other bonds.

How To Invest in Government Bonds

You can either buy bonds directly via the Central Bank of Kenya or use a third party such as a broker, commercial or investment bank.

1. Directly via CBK

This way, you have to visit the CBK main offices or their branches in Mombasa, Kisumu, Nyeri, Eldoret, and Nakuru. You then have to open a CDS account by collecting the application documents, filling them in and submitting other relevant documents.

You will also activate the mobile CBK TMD service that allows you to buy bonds from your phone via their USSD code. *866#

This is the hardest but the best way. Even though you will spend a lot of time going to CBK offices and your bank to get the documents stamped and verified, you will also cut down on your investment costs as third parties charge for the service.

2. As a nominee

Third parties like commercial banks, investment banks and other registered brokers can open a CDS account on behalf of their clients and help them invest in bonds and charge a small fee.

The good thing, despite the cost, is that you can sell or buy bonds in the secondary market with a third party. That means if you buy a 20-year bond and need your money in the 10th year, you can quickly sell your bond to a willing buyer in the secondary market.

How Do You Make Money Investing in Bonds

Third parties like commercial banks, investment banks and other registered brokers can open a CDS account on behalf of their clients and help them invest in bonds and charge a small fee.

The good thing, despite the cost, is that you can sell or buy bonds in the secondary market with a third party. That means if you buy a 20-year bond and need your money in the 10th year, you can quickly sell your bond to a willing buyer in the secondary market.

Taxes

For bonds with a tenor of below ten years, a withholding tax of 15% is charged.

Bonds with a tenor of more than ten years are subject to a withholding tax of 10%.

Infrastructure bonds are tax-exempt.