Treasury Bills lesson 1

Understanding Treasury Bills and Treasury Notes in Kenya

A Beginner’s Guide to Lending Money to the Government and Earning a Return

Introduction: Can Your Money Work for You?

Imagine you have saved KSh 50,000 from your salary, business, farming activities, or other sources of income. You want your money to grow, but you are not ready to start a business or invest in the stock market.

What if you could lend that money to the Government of Kenya for a specified period and receive your money back with a return?

This is the basic idea behind government securities. In Kenya, the two main types you should understand are Treasury bills and Treasury bonds.

Treasury bills are designed for short-term investing, while Treasury bonds generally serve medium- to long-term investment needs. Understanding the difference can help you make better financial decisions.

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1. What Are Treasury Bills?

A Treasury bill (T-bill) is a short-term financial instrument issued by the Government of Kenya to borrow money from investors.

The government borrows this money to help finance its spending and manage its financial obligations. In return, it promises to pay investors the agreed amount when the bill matures.

In Kenya, Treasury bills are issued through the Central Bank of Kenya (CBK) on behalf of the National Treasury.

How Do Treasury Bills Work?

Treasury bills work differently from an ordinary savings account.

Instead of depositing money and earning interest every month, you buy a bill at a price lower than the amount you will receive when it matures.

The difference between what you pay and what you receive is your investment return before applicable taxes and other costs.

For example:

Suppose you purchase a Treasury bill with a face value of KSh 100,000.

- You pay approximately KSh 97,000 when purchasing it. - You hold the bill until its maturity date. - The government pays you KSh 100,000 at maturity. - Your gross return is KSh 3,000.

These figures are illustrative, not a live investment quotation. The actual purchase price depends on the auction yield, the bill's remaining term and applicable taxes.

The key lesson: You do not necessarily need to receive monthly interest payments to earn a return from an investment.

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2. What Are the Different Types of Treasury Bills in Kenya?

The Central Bank of Kenya offers Treasury bills with three standard maturity periods.

A. The 91-Day Treasury Bill

This bill matures in approximately three months.

It may suit someone who wants to invest money for a relatively short period without committing it for a full year.

For example, you might consider it if you have savings that you do not expect to need for the next three months.

B. The 182-Day Treasury Bill

This bill matures in approximately six months.

It may suit someone who has a financial goal coming up in about half a year, provided the money will not be needed before maturity.

For example, you might be saving towards school fees, a planned business purchase or another future expense.

C. The 364-Day Treasury Bill

This bill matures in approximately one year.

It may suit someone who can leave their money invested for a longer period and wants to plan around a one-year financial goal.

For example, you might have savings set aside for a business expansion that you do not expect to begin until next year.

Which One Should You Choose?

The right Treasury bill depends on three main questions:

- When will you need the money? - What return is available at the current auction? - Can you leave the money invested until maturity?

Do not choose an investment based on its advertised yield alone. Your financial goal and access to cash matter just as much.

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3. What Are Treasury Notes?

A Treasury note is generally a medium-term government debt security in financial markets that use the distinction between Treasury bills, notes and bonds.

However, Kenya's main official retail government securities categories are Treasury bills and Treasury bonds. The Central Bank of Kenya does not use the US-style Treasury bill, Treasury note and Treasury bond classification as its standard public-facing investment categories.

This distinction is important because terminology varies between countries.

In the United States, for example, Treasury notes generally have maturities of two to ten years. Kenya instead offers Treasury bonds across a range of medium- and long-term maturities.

Therefore, when learning how to invest in government securities in Kenya, you should focus on Treasury bills and Treasury bonds, rather than assuming that a Treasury note is a separate standard product available locally.

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4. What Are Treasury Bonds in Kenya?

A Treasury bond (T-bond) is a government security that allows you to lend money to the Government of Kenya for a medium or long period.

Unlike a typical Treasury bill, which generates its return through the difference between its purchase price and face value, many Treasury bonds pay interest periodically.

Most commonly issued fixed-rate Treasury bonds pay interest every six months. When the bond reaches maturity, the government repays the principal according to its terms.

Example: How a Treasury Bond Can Generate Income

Imagine you purchase a Treasury bond with a face value of KSh 100,000 and a hypothetical annual coupon rate of 10%.

Assuming you purchase it at face value and the coupon remains fixed:

- Annual interest: KSh 10,000. - Interest paid every six months: KSh 5,000. - Principal repayment at maturity: KSh 100,000, subject to the bond's terms.

This example excludes taxes and transaction costs and assumes the bond is held to maturity.

The key difference: A conventional fixed-rate Treasury bond can provide periodic income, while a Treasury bill normally delivers its return when the bill matures.

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5. Treasury Bills vs Treasury Bonds: What Is the Difference?

Feature| Treasury bills| Treasury bonds Investment period| 91, 182 or 364 days| Generally one year or longer, depending on the issue Main return mechanism| Discount between purchase price and face value| Usually periodic interest payments Interest payments| Normally none during the bill's life| Usually every six months for fixed-coupon bonds Typical purpose| Short-term financial goals| Medium- and long-term goals Auction frequency| Weekly| Generally monthly Minimum investment| Check current CBK requirements| Check current CBK requirements Early access| Limited; early exit can be costly| Secondary-market sale may be possible, subject to market conditions

Both are government borrowing instruments. Their actual returns, taxation, purchase prices and other terms depend on the specific security and current CBK rules.

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6. Why Does the Kenyan Government Borrow Through Treasury Bills and Bonds?

Governments collect revenue through taxes, fees and other sources. However, government revenue and spending do not always occur at the same time, and revenue may not be sufficient to cover all planned expenditure.

The government therefore borrows from domestic and international sources.

Treasury bills help meet short-term borrowing needs, while Treasury bonds provide another way to finance government expenditure over longer periods.

When you invest in a Kenyan government security, you are effectively becoming a lender to the government.

Your investment forms part of the government's domestic borrowing.

Important: Government securities are generally considered lower-risk than many private investments, but they are not the same as a bank deposit. They remain subject to government credit risk, inflation risk and, where you sell before maturity, market-price risk.

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7. How Do Investors Make Money From Treasury Bills?

The most important concept is the relationship between the purchase price, the face value and the yield.

Suppose a Treasury bill promises to pay KSh 100,000 at maturity.

If you pay KSh 97,000 to acquire it, your gross return is:

KSh 100,000 − KSh 97,000 = KSh 3,000.

The KSh 3,000 is your gross investment gain, before applicable taxes and costs.

What Is Yield?

Yield is a measure of the return on an investment relative to its price and the period over which it is held.

For Treasury bills, the quoted yield is generally annualised. This means you should not assume that a bill maturing in three months will earn the same amount of money as a full year's investment at the same quoted annual yield.

The actual purchase price depends on the auction terms and yield calculation used.

Does a Higher Yield Always Mean a Better Investment?

Not necessarily.

A higher quoted yield may be attractive, but you should also consider:

- How long your money will be committed. - When you need the money back. - Whether the investment fits your financial goals. - The effect of taxes and inflation on your real return. - Whether the auction will accept your bid.

Your objective should be to earn a suitable return without sacrificing money you need for essential expenses.

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8. How Can an Ordinary Kenyan Invest in Treasury Bills?

You do not need to own a large company to begin learning about government securities.

Individuals can invest through the Central Bank of Kenya's official investment channels, subject to the relevant account requirements and investment rules.

Step 1: Understand Your Financial Position

Before investing, calculate your monthly income, essential expenses, debts and existing savings.

Separate the money you need for daily living from the money you can afford to invest.

Step 2: Decide How Much You Can Commit

Do not invest your entire savings simply because a Treasury bill appears attractive.

Keep enough money accessible for emergencies, household expenses and obligations that may arise before the investment matures.

Step 3: Open a CBK DhowCSD Account

The Central Bank of Kenya provides the DhowCSD web portal and mobile application for eligible investors to access government securities.

Visit the official portal:

https://dhowcsd.centralbank.go.ke/

Review the current account-opening requirements before proceeding.

Step 4: Review the Available Treasury Bills

Check the current auction information and compare the 91-day, 182-day and 364-day bills.

Review the applicable yields, auction conditions, payment deadlines and settlement instructions.

Step 5: Submit Your Bid

Follow the instructions in the DhowCSD platform to select the security and submit your bid.

The government may accept or reject bids in accordance with the auction rules. Submitting a bid does not automatically guarantee allocation.

Step 6: Pay for a Successful Bid

If your bid is accepted, follow the official payment instructions and deadlines.

Keep your transaction records and monitor your investment through the relevant account.

Step 7: Plan for Maturity

Before the bill matures, decide whether you will use the proceeds for your financial goal or reinvest some of the money.

Reinvestment should be a deliberate decision, not an automatic assumption. The rates available in the next auction may be different.

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9. How Much Money Do You Need to Start?

The minimum investment amount and bidding rules are determined by the Central Bank of Kenya and may depend on the type of bid and the applicable requirements.

Check the latest official Treasury bill instructions before deciding how much to invest.

This is especially important because older articles and investment guides may quote minimum amounts that have since changed.

Do not confuse the face value of a Treasury bill with the amount you must pay to purchase it. Since bills are generally sold at a discount, the purchase price can be lower than the face value.

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10. What Are the Risks of Treasury Bills?

Treasury bills are often considered relatively conservative investments, but understanding their limitations is essential.

A. Liquidity Risk

Your money is committed until the maturity date.

Although CBK has a rediscounting facility for investors who need early access, it is a last-resort option and may involve a financial penalty.

Do not treat a Treasury bill as a substitute for readily available emergency savings.

B. Inflation Risk

Inflation reduces the purchasing power of money over time.

If your investment earns a nominal return of 8% while prices rise by 7%, your real gain in purchasing power is much smaller than the nominal return suggests.

C. Reinvestment Risk

When a Treasury bill matures, you may want to invest again.

However, the next auction may offer a lower yield. Your future returns are therefore not guaranteed to match your previous investment.

D. Government Credit Risk

Treasury bills are obligations of the Government of Kenya. They are generally viewed as lower-risk than many private-sector investments, but repayment still depends on the government's ability and willingness to meet its obligations.

E. Opportunity Cost

Money committed to a Treasury bill cannot simultaneously be used to expand your business, buy stock for resale or pursue another investment opportunity.

Consider what else that money might reasonably accomplish before committing it.

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11. Are Treasury Bills Better Than a Savings Account?

Neither option is automatically better for everyone.

A savings account can be useful when you need convenient access to your money. A Treasury bill may suit money that you can leave invested until a specified maturity date.

Consider the following:

- Emergency savings: Prioritise accessibility. - Money needed in three months: A 91-day Treasury bill may be worth evaluating if the maturity date fits your obligation. - Money needed in six months: Consider whether a 182-day bill fits your timeline. - Money you can commit for a year: Compare the 364-day bill with other suitable options. - Money needed for long-term income: Learn about Treasury bonds as well.

Compare the net returns, accessibility and terms of each option rather than focusing only on the quoted interest rate.

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12. A Practical Kenyan Example: Turning Savings Into a Financial Plan

Imagine a salaried Kenyan earns KSh 40,000 per month and manages to save KSh 5,000 monthly.

After six months, those contributions total KSh 30,000, excluding any investment returns.

That person now has a choice: keep building accessible savings, invest when eligible, or combine both approaches.

The most important step is not immediately choosing a Treasury bill. It is identifying what the money is intended to accomplish.

For example:

- Money for next month's rent should remain accessible. - Money for a school-fees payment due in three months should be matched carefully to that deadline. - Money intended for a future business expansion may be suitable for a longer-term investment if it is not needed earlier.

Financial planning starts by giving every shilling a purpose.

An investment is useful when it supports your financial goals, not merely when it offers a return.

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13. Key Terms You Should Understand

Treasury bill: A short-term government borrowing instrument.

Treasury bond: A medium- or long-term government security, usually paying periodic interest.

Treasury note: A term commonly used in other markets for medium-term government debt; it is not Kenya's standard public-facing category for government securities.

Face value: The amount payable at maturity under the security's terms.

Maturity date: The date on which the security reaches the end of its agreed investment period and the amount due is payable.

Yield: A measure of investment return, commonly expressed as an annualised percentage.

Discount: The difference between the face value of a Treasury bill and its lower purchase price.

Coupon: The periodic interest payment made by a coupon-paying bond.

Auction: The process through which investors submit bids for government securities.

DhowCSD: The Central Bank of Kenya's platform for accessing and managing investments in government securities.

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14. What Should You Learn Next?

Understanding Treasury bills is one step towards becoming financially informed.

Once you understand the basics, explore these subjects in sequence:

1. How Treasury bill auctions work in Kenya. 2. How to calculate Treasury bill returns. 3. How withholding tax affects your actual earnings. 4. How Treasury bills compare with Treasury bonds. 5. How to build an emergency fund before investing. 6. How to match investments to short-, medium- and long-term financial goals. 7. How to reinvest maturing Treasury bills without depending on a particular future interest rate.

These lessons will help you move from simply knowing what a Treasury bill is to understanding when it may or may not be appropriate for your financial situation.

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Conclusion: Understand Before You Invest

Treasury bills provide a way for individuals and institutions to lend money to the Government of Kenya for a short period and receive a return at maturity.

Treasury bonds provide another route for lending to the government, generally over a longer period and often with regular interest payments.

The difference between these instruments matters because the length of time you can commit your money, the return you expect and the date you need your money back should guide your decision.

Your first step towards investing is not necessarily buying a security. It is understanding your finances, identifying your goals and learning how each investment works.

Learning note: This article is for financial education, not personalised investment advice. Always check current auction terms, minimum investment requirements, taxation and payment instructions directly with the Central Bank of Kenya before investing.