Investing in Government Securities

The government has a social duty and mandate to provide things such as roads, hospitals, schools, national defence, pay its administrative expenses and improve the general welfare of citizens. More often than not, the money the government receives from taxes is not enough to cover spending. In such circumstances, the government has to borrow money to be able to finance its spending. To do this, it issues Treasury Bonds and Treasury Bills (both are collectively known as government securities) through the Central Bank of Kenya (CBK), which is the banker to the government.  The CBK is the government’s agent when it comes to borrowing through Treasury Bills and Treasury Bonds.

In essence, the government takes a loan from everyone who purchases government securities, and like with any other loan, there is a repayment period and an interest rate specific to that loan. Buying government securities in simple terms is the same as lending money to the government.

The key difference between Treasury bonds and Treasury bills is the loan repayment period; bonds usually have loan repayment periods ranging from one year to thirty years, while T-bills have repayment periods of less than one year. These periods are 91-days, 184 days and 364 days, in other words, 3 months, 6 months and a year. With bonds, the government guarantees the investor an annual interest payment known as the annual coupon. At the end of the bond period the government then gives the bond investor his initial amount. For example, in  the case of the 30 year Savings Development Bond recently issued by the government, investors are guaranteed a 12% annual interest payment, paid out semi-annually. Hence an investor who purchased bonds worth Kshs 100,000 is assured of an annual payment of Kshs 12,000. At the end of the 30 years, the government then pays the investor the initial Kshs 100,000. With Treasury bills on the other hand, a bill that carries an interest rate of say 6% would ensure that the investor gets his principal plus interest at the end of the period, be it 3 months, 6 months or a year. Note that the interest rate on t-bills is an annual rate.

Treasury bonds are usually a good investment due to their risk-free nature. Investors in bonds are usually guaranteed of their interest payments and therefore don’t have to worry about default. It is important to note that, to date, the government of Kenya has never defaulted on its debt obligations.

T-bills on the other hand, are a good way to store cash for the short term and earn interest. A lot of big companies who have good cash flows often store their “excess” cash in T-bills while they look for long term investment opportunities. Therefore, if you also have some cash that you want to invest, but don’t yet know how you will invest it you can buy T-bills while you plan on where to invest it for the long-term. The two types of government securities are therefore appropriate depending on your investment horizon. Bonds are for the long term while bills are for the short term.
You can invest in government securities directly or indirectly. The direct approach would entail opening a central depository system (CDS) account at the CBK or any of its agents (commercial banks, investment banks, stock brokers) and then having a minimum amount of kshs.100,000 for Treasury bills and kshs.50,000 for Treasury bonds. The indirect approach would entail investing through unit trust funds known as money market funds or bond funds, which pool money from many investors and invest it collectively in government securities; minimum amounts vary from one service provider to another, this approach is more convenient to individuals who might find it difficult to invest directly for various reasons.