The Central Bank of Kenya (CBK) has announced the re-opening of two fixed-coupon Treasury bonds, targeting the collection of KSh 30 billion to support government budgetary obligations. These bonds, FXD1/2018/15 and FXD1/2022/25, present long-term investment opportunities with maturities of 15 and 25 years, respectively.

This latest move aligns with Kenya’s broader strategy to finance its fiscal deficit amid a challenging global and domestic economic environment. With attractive coupon rates, the bonds are likely to appeal to a wide range of investors, from individuals to institutions.

Details of the Bonds: Key Features and Dates

The FXD1/2018/15 bond carries a fixed coupon rate of 12.6500%, while the FXD1/2022/25 bond offers a higher rate of 14.1880%. These rates are particularly appealing in a market where Treasury bills, short-term securities, are offering lower returns of approximately 11%.

Interest payments for the FXD1/2018/15 bond will begin on May 19, 2025, and continue semi-annually until its maturity on May 9, 2033. For the FXD1/2022/25 bond, the first interest payment will be made on April 21, 2025, with subsequent payments scheduled semi-annually until its redemption date on September 23, 2047.

The bond sale period runs from December 13, 2024, to January 15, 2025, with the auction results to be announced on January 15, 2025. Successful bidders will be required to make payments by January 17, 2025.

Accessibility and Minimum Investment Thresholds

To encourage participation across various investor categories, the CBK has set the minimum investment amount at KSh 50,000 for both bonds. Non-competitive bids are capped at KSh 50 million per Central Securities Depository (CSD) account, making it an inclusive option for individual and smaller investors.

For those opting for competitive bidding, the minimum investment is pegged at KSh 2 million per CSD account. These thresholds allow a blend of retail and institutional investors to partake in the investment opportunity.

Special exemptions apply to state corporations, public universities, and semi-autonomous government agencies, which are not subject to the cap on non-competitive bids, enabling them to make larger investments.

Why Treasury Bonds Are Gaining Popularity

The growing demand for Treasury bonds is rooted in their stability and attractive returns, especially in the context of rising interest rates globally. Unlike Treasury bills, which are short-term instruments with tenors of 3, 6, or 12 months, Treasury bonds are long-term investments with tenors ranging from 2 to 30 years.

The CBK has reported a consistent trend: Treasury bills have recently underperformed in auctions, while demand for Treasury bonds has surged. Economist Daniel Kathali attributes this shift to the bonds’ higher interest rates and the allure of long-term investment.

“Investors go where they get more money,” Kathali remarked. “With interest rates on Treasury bills having dropped to around 11%, bonds have become the preferred option for those seeking better returns and long-term security.”

Additionally, Treasury bonds provide predictable income streams through semi-annual interest payments, making them attractive to pension funds, insurance companies, and individuals planning for retirement.

Tax Implications and Comparisons

Investors should note that Treasury bonds are subject to a 15% withholding tax on interest earned, whereas the principal amount remains tax-exempt. This tax policy applies to both individual and institutional investors, underscoring the importance of factoring tax liabilities into investment decisions.

In contrast, Treasury bills offer shorter tenors but lower returns, making them suitable for investors with short-term liquidity needs. However, the declining interest rates on bills have led to a migration of investors toward the higher yields offered by bonds.

The Role of Treasury Bonds in Kenya’s Economic Landscape

The re-opening of these bonds comes at a critical time for Kenya, as the government grapples with fiscal pressures exacerbated by global economic challenges and domestic budgetary needs. Treasury bonds serve as a vital tool for the government to finance its operations and infrastructure projects without resorting to more expensive external borrowing.

In the current economic climate, marked by currency volatility and rising global interest rates, local debt instruments like Treasury bonds provide a more sustainable financing option. For investors, they offer a hedge against inflation and a relatively safe avenue for wealth preservation.

Treasury Bonds as a Tool for Financial Inclusion

The CBK has taken steps to ensure that Treasury bonds are accessible to a broad spectrum of investors. By setting a low minimum investment threshold of KSh 50,000, the bonds are within reach of middle-class Kenyans looking to diversify their portfolios.

The introduction of digital platforms for bond purchases has further enhanced accessibility. Through mobile banking apps and online portals, investors can now participate in bond auctions without visiting physical bank branches. This digitization aligns with Kenya’s broader push toward financial inclusion and technological innovation in the financial sector.

A Growing Appetite for Government Securities

The increased interest in government securities is part of a broader trend in Kenya’s financial markets. As traditional savings accounts offer diminishing returns due to low-interest rates, more Kenyans are turning to Treasury bonds as a viable alternative.

This shift is also driven by heightened awareness and education about investment opportunities. Organizations like the CBK have ramped up public awareness campaigns to demystify government securities, encouraging participation from first-time investors.

Global Context and Comparative Analysis

Kenya’s approach to leveraging Treasury bonds mirrors strategies employed by other emerging markets. For instance, countries like Nigeria and South Africa have also turned to domestic debt instruments to finance their budgets, reduce reliance on external debt, and mitigate foreign exchange risks.

In the global context, Kenya’s fixed-coupon bonds are competitive, offering returns that are higher than similar instruments in developed markets, where interest rates have traditionally been lower. This makes Kenyan bonds attractive not only to local investors but also to foreign portfolio investors seeking higher yields.

Looking Ahead: Future Prospects for Treasury Bonds in Kenya

As Kenya continues to navigate economic challenges, Treasury bonds will remain a cornerstone of its debt management strategy. The government’s ability to attract investment through these instruments will be crucial in addressing its fiscal deficit while avoiding excessive reliance on external borrowing.

For investors, the bonds represent an opportunity to participate in the country’s economic development while earning competitive returns. As the CBK continues to innovate and improve access to these instruments, Treasury bonds are likely to become an increasingly popular choice for both retail and institutional investors.

In conclusion, the re-opening of the FXD1/2018/15 and FXD1/2022/25 bonds underscores Kenya’s commitment to leveraging domestic resources to finance its budgetary needs. With attractive yields, accessible thresholds, and robust demand, these bonds are set to play a pivotal role in shaping Kenya’s economic future. Whether you’re a seasoned investor or a first-time participant, now is the time to consider the potential of Treasury bonds as a secure and rewarding investment avenue.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

17th December, 2024