Treasury Bonds

• What it is: Long-term loans (2-30 years) to the Kenyan government
• Risk level: Very low (backed by Kenyan government)
• Typical return: 12-16% annually
• Key consideration: Pays interest (coupon) twice a year; can be sold before maturity on the NSE
• Real example: KSh 10,000 in a 10-year bond at 14% = KSh 1,400 per year in interest payments
• Where to get it: Central Bank of Kenya, M-Akiba (mobile platform), or through a broker
• Minimum to start: KSh 50,000 for regular bonds, but as little as KSh 3,000 through M-Akiba
• Special option: Infrastructure Bonds are similar but tax-free and often offer higher returns

Bond Investing Made Simple

Think of bonds like lending money to a friend:

• Who you lend to matters: Lending to the government (safer) pays less than lending to a small company (riskier)
• How long you lend matters: Lending for 10 years usually pays more than lending for 1 year
• Interest rates matter: When rates go up, the value of existing bonds goes down (and vice versa)

Two main numbers to look at:

1. Yield to Maturity (YTM): Your total return if you hold until the end
2. Credit Rating: AAA (safest) down to D (likely to default)

Treasury Bonds Visualization

Treasury Bonds and Economic indicators:

Financial Insights 

Key

1. For a Short-Term Investor

What They Want:

• Quick access to their money with minimal risk.
  
• Bonds whose prices don’t change much if interest rates move slightly.
  
• FXD1/2021/2 & FXD1/2024/2 suits the above investor

Why:

Example 1: FXD1/2021/2

• Bond Details:
  
  • Maturity: 2 years
    
  • Coupon Rate: 9.47% per annum
    
  • Clean Price: 100 (think of this as 100 Ksh per 100 Ksh of face value)
    
  • Yield: 8.07% per annum
    
  • Market Activity: Actively traded (Value Traded: 110,348)
    
• How the Investment Works:
  
  • Buying the Bonds:
    
    • Assume the bond’s par (face) value is 100 Ksh.
      
    • With 1,000,000 Ksh, you can purchase roughly 10,000 units (1,000,000 / 100).
      
  • Coupon Income:
    
    • Each bond pays 9.47 Ksh per year (9.47% of 100).
      
    • Total annual coupon income = 10,000 × 9.47 = 94,700 Ksh.
      
  • At Maturity:
    
    • After 2 years, you receive your final coupon payment and the redemption amount.
      
    • The redemption value is given as 97.939 per 100 Ksh, so you’d get 10,000 × 97.939 = 979,390 Ksh back as principal.
      
  • Total Return:
    
    • Over 2 years, you receive approximately 189,400 Ksh in coupons (94,700 × 2) plus the principal of about 979,390 Ksh.
      
    • Your total cash flow is around 1,168,790 Ksh, meaning a gain over your initial 1,000,000 Ksh.

• Key Points:
  
  • Speed of Return: Money is tied up for only 2 years.
    
  • Liquidity: High trading volume makes it easier to sell if you need cash before maturity.
    
  • Risks: Minimal market risk if held to maturity; however, if you need to sell early, market fluctuations might affect the sale price.
    

Example 2: FXD1/2024/2

• Bond Details:
  
  • Maturity: 2 years
    
  • Coupon Rate: 16.97% per annum
    
  • Clean Price: 97.5
    
  • Yield: 17.6% per annum
    
  • Market Activity: (Short maturity makes it attractive)
    
• How the Investment Works:
  
  • Buying the Bonds:
    
    • With a clean price of 97.5, each bond costs 97.5 Ksh for 100 Ksh par value.
      
    • 1,000,000 Ksh would buy roughly 10,256 units (1,000,000 / 97.5).
      
  • Coupon Income:
    
    • Each bond pays 16.97 Ksh per year.
      
    • Total annual coupon income = 10,256 × 16.97 ≈ 174,200 Ksh.
      
  • At Maturity:
    
    • The redemption value is 90 per 100 Ksh, so you get 10,256 × 90 ≈ 923,040 Ksh back as principal.
      
  • Total Return:
    
    • Over 2 years, coupon income would be around 348,400 Ksh, plus the redemption amount of about 923,040 Ksh, totaling roughly 1,271,440 Ksh.
      
  • Considerations:
    
    • Even though the bond is purchased at a premium (since 97.5 is close to par and redemption is lower at 90), the high coupon payments more than make up for this difference.
      
• Key Points:
  
  • Quick turnaround: Money is available after 2 years.
    
  • High Coupon Income: Attractive for short-term cash flow despite a lower redemption value.
    
  • Risks: Similar to the first example—main risk is if you need to liquidate before maturity, market conditions could affect the sale.

2. For a Long-Term Investor

What They Want:

• A safe and steady income over a long period.
• Investments that help preserve capital and offer predictable returns, even if reinvesting is necessary.
• FXD1/2018/25 & FXD1/2018/25  suits the above investor
• Add: Longer term bonds are good for capital preservation

Why:

Example 1: FXD1/2018/25 (First Instance)

• Bond Details:
  
  • Maturity: 25 years
    
  • Coupon Rate: 13.4% per annum
    
  • Clean Price: 97.442
    
  • Yield: 13.89% per annum
    
  • Market Activity: Reasonably active (Value Traded: 82,374)
    
• How the Investment Works:
  
  • Buying the Bonds:
    
    • At a clean price of about 97.44, you can buy approximately 10,260 units with 1,000,000 Ksh (1,000,000 / 97.44).
      
  • Coupon Income:
    
    • Each bond pays 13.4 Ksh per year (13.4% of 100).
      
    • Annual coupon income = 10,260 × 13.4 ≈ 137,484 Ksh.
      
  • Holding Period:
    
    • Over 25 years, you receive steady annual coupon payments, providing regular income.
      
  • At Maturity:
    
    • The bond’s redemption value (the amount you get back) might be less than 100, but the yield calculation (13.89%) already factors in the lower principal repayment.
      
    • You would receive a lump sum at maturity plus all the coupon payments.
      
  • Total Considerations:
    
    • You benefit from high annual income over a long period.
      
    • Price fluctuations in the market matter less if you plan to hold until maturity.
      
• Key Points:
  
  • Steady Income: Regular coupons provide reliable cash flow.
    
  • Long-Term Growth: Although market prices may swing, holding to maturity locks in the yield.
    
  • Risks: Interest rate changes over 25 years and inflation could affect the real value of income, but these are generally acceptable risks for long-term investors.
    

Example 2: FXD1/2018/25 (Second Instance)

• Bond Details:
  
  • Maturity: 25 years
    
  • Coupon Rate: 12.9% per annum
    
  • Clean Price: 97.442 (similar pricing)
    
  • Yield: 13.89% per annum
    
  • Market Activity: Moderate (Value Traded: 52,048)
    
• How the Investment Works:
  
  • Buying the Bonds:
    
    • With the same clean price, you’d also buy around 10,260 units with 1,000,000 Ksh.
      
  • Coupon Income:
    
    • Each bond pays 12.9 Ksh per year.
      
    • Annual coupon income = 10,260 × 12.9 ≈ 132,354 Ksh.
      
  • Holding Period:
    
    • Over 25 years, the regular coupon income provides a steady income stream.
      
  • At Maturity:
    
    • Similar to the first instance, you’d get your final principal (which is lower than par but reflected in the yield) plus the coupon payments.
      
  • Total Considerations:
    
    • The difference here is a slightly lower annual income compared to the first instance.
      
    • This gives you a choice if you’re looking for a marginally lower coupon but might expect other benefits such as differences in market liquidity or pricing stability.
      
• Key Points:
  
  • Long-Term Income: Consistent annual payments over 25 years.
    
  • Holding Strategy: Best if you can commit to a long investment horizon.
    
  • Risks: Like the other long-term bond, you face interest rate and inflation risks, but these are balanced by the high yield.
    

3. For a Bond Trader (Banks/Financial Institutions)

What They Want:

• To find opportunities where bonds are temporarily mispriced.
  
• Instruments with larger differences between the coupon rate and the yield, creating a chance for quick profits when the market corrects.
• FXD2/2019/5 & FXD1/2019/5 suits the above investor
  

Why:

Example 1: FXD2/2019/5

• Bond Details:
  
  • Maturity: 5 years
    
  • Coupon Rate: 11.49% per annum
    
  • Clean Price: 97.87
    
  • Yield: 12.47% per annum
    
  • Market Activity: Very active (Value Traded: 177,805)
    
• How the Investment Works:
  
  • Buying the Bonds:
    
    • With a clean price of 97.87, you can buy about 10,217 units (1,000,000 / 97.87).
      
  • Coupon Income:
    
    • Each bond pays 11.49 Ksh per year.
      
    • Annual coupon income = 10,217 × 11.49 ≈ 117,400 Ksh.
      
  • Trading Opportunities:
    
    • Because this bond is actively traded, its price will fluctuate with changes in interest rates and market sentiment.
      
    • A trader may decide to sell before maturity if market prices rise, capturing a capital gain on top of the coupon income.
      
  • Exit Strategy:
    
    • The trader closely watches interest rate trends. For instance, if rates fall, the bond’s price might increase, creating an opportunity to sell at a profit.
      
  • Total Considerations:
    
    • Trading involves both collecting coupon income and profiting from capital gains/losses.
      
    • Active liquidity helps ensure that the trader can enter or exit positions quickly.
      
• Key Points:
  
  • Active Trading: High liquidity makes it easier to buy and sell quickly.
    
  • Flexibility: The trader isn’t locked in until maturity and can adjust holdings as market conditions change.
    
  • Risks: Market fluctuations mean the bond’s price can go down as well as up. Quick decisions and market timing are essential.
    

Example 2: FXD1/2019/5

• Bond Details:
  
  • Maturity: 5 years
    
  • Coupon Rate: 12.01% per annum
    
  • Clean Price: 97.87
    
  • Yield: 12.92% per annum
    
  • Market Activity: Actively traded (Value Traded: 100,358)
    
• How the Investment Works:
  
  • Buying the Bonds:
    
    • At the same clean price of 97.87, you can also buy around 10,217 units with your 1,000,000 Ksh.
      
  • Coupon Income:
    
    • Each bond pays 12.01 Ksh per year.
      
    • Annual coupon income = 10,217 × 12.01 ≈ 122,706 Ksh.
      
  • Trading Opportunities:
    
    • As with FXD2/2019/5, this bond’s 5-year term means its price will react noticeably to changes in market interest rates.
      
    • A trader can take advantage of these fluctuations by selling when the price rises.
      
  • Exit Strategy:
    
    • The trader might hold the bond for a short period to capture a favorable price movement, while still enjoying coupon payments during the hold.
      
  • Total Considerations:
    
    • The slightly higher coupon provides a bit more income, which can cushion against potential price dips.
      
    • The overall strategy is to balance coupon income with timely sales for capital gains.
      
• Key Points:
  
  • Active Market: Good liquidity supports quick trades.
    
  • Short to Medium Holding Period: Flexibility to adjust positions as market conditions shift.
    
  • Risks: Must monitor market conditions continuously to avoid losses if prices fall unexpectedly.
    

Final Recap

• Short-Term Investors:
  
  • Bonds: FXD1/2021/2 and FXD1/2024/2
    
  • Scenario: Invest 1,000,000 Ksh, buy roughly 10,000 units, collect high coupon payments over 2 years, and get your principal back quickly.
    
  • Benefits: Quick turnaround and high liquidity.
    
  • Risks: Price fluctuations if you need to sell early.
    
• Long-Term Investors:
  
  • Bonds: FXD1/2018/25 (two different issues)
    
  • Scenario: Invest 1,000,000 Ksh, purchase around 10,260 units, and receive steady annual coupons (around 13.4% or 12.9% per annum) over 25 years.
    
  • Benefits: Regular, predictable income over a long period.
    
  • Risks: Long-term exposure to interest rate changes and inflation, though less important if held to maturity.
    
• Bond Traders:
  
  • Bonds: FXD2/2019/5 and FXD1/2019/5
    
  • Scenario: With 1,000,000 Ksh, buy roughly 10,230 units of a 5-year bond that pays annual coupons (11.49% or 12.01%).
    
  • Benefits: Actively traded bonds offer the chance to profit from market price movements along with coupon income.
    
  • Risks: Must be prepared for market fluctuations and need to react quickly to changing interest rates.

Q1: Treasury Market vs. Money Market – Kenyan Perspective 

Summary: Which is Better for You?

Q2:  Why Banks and Pension Funds Prefer Treasury Bonds AS Compared to investing in the MMFs

Why Not the Money Market?

Real-World Example (Kenya):

• In 2023–2025, Kenyan pension schemes allocated over 50% of their portfolio to government securities, largely in long-dated bonds.
  
• Banks often use T-Bills and T-Bonds to manage excess liquidity and meet CBK reserve requirements — while still earning a return.
  
• Leading MMFs are excellent for retail and SME investors, but institutional investors often outgrow them due to their size, strategy, and regulatory environment.
  

Summary:

Q3: What are some of the Characteristics of Bonds Banks Would Go For

Macro Economic Perspective

1. Monetary Policy and Exchange Rate Dynamics

U.S. Policy Environment:
Over the period, U.S. monetary policy evolved significantly. Starting with extremely low Fed rates (0.14% in 2015) and modest inflation, the U.S. experienced a gradual increase in the Fed rate up to 2.16% by 2019, a fall during the pandemic, and then a sharp rise to approximately 5% by 2023–2025. U.S. inflation, which was minimal in 2015 (around 0.20%), increased significantly to peak around 8% in 2022 before moderating. The real rate (Fed rate minus inflation) was negative or very low in the early years but turned positive by 2023, influencing global capital flows.

Kenyan Monetary Environment:
Kenya has maintained a high Central Bank Rate (CBR)—around 16.1% in 2015—gradually declining to about 10.75% by 2025. Despite relatively high nominal rates, Kenya’s inflation has moderated from approximately 6.6% in 2015 to about 3.6% in 2025, resulting in a robust real yield that stabilized around 5.9% in recent years. Importantly, the risk premium, or the rate spread between Kenya’s yields and U.S. Fed rates, has narrowed from roughly 16 percentage points in 2015–2016 to about 8.6 percentage points by 2023–2025.

Foreign Exchange Rates (USD/KES):

• In 2015, the exchange rate was approximately 98.24 KES per USD.
  
• It gradually increased to around 103.39 in 2017, then fell slightly in 2018 to 101.29 and remained close to 102–106 until 2020.
  
• A more marked depreciation occurred thereafter: 109.67 in 2021, 123 in 2022, and reaching a peak of approximately 139.83 in 2023.
  
• By 2024, the rate moderated to 134.74 and further to 129.25 in 2025.
  

This trend reflects a gradual depreciation of the Kenyan shilling over the period, particularly accelerating from 2021 onward.

2. Impact on Investment, Exports, and Inflation

Foreign Direct Investment (FDI):

• Early Period (2015–2017):
  U.S. real rates were near zero or negative, while Kenya’s high nominal yields—along with a wider risk premium (around 16%)—meant that investors were cautious about the higher risks in Kenya.
  
• Later Period (2023–2025):
  As U.S. rates increased and real yields turned positive, the narrowing rate spread (around 8.6%) improved Kenya’s relative attractiveness. However, the significant depreciation of the shilling (from about 98 KES in 2015 to roughly 129 KES in 2025) adds exchange rate risk to foreign investments. If investors expect further depreciation, that risk may offset the attractive yields. On the other hand, a stabilized or moderating exchange rate (as seen in 2024–2025) can boost investor confidence and FDI inflows.
  

Export Competitiveness:

• Depreciation Benefits:
  The marked depreciation of the Kenyan shilling makes Kenyan exports cheaper on the global market. For instance, moving from around 98 KES per USD in 2015 to 139.83 in 2023 suggests a substantial competitive advantage for exporters in the short term.
  
• Cost and Input Considerations:
  While a weaker currency supports exports by lowering the price of Kenyan goods abroad, it also makes imported inputs more expensive. If these higher input costs are not offset by increased productivity or pricing power, profit margins could be squeezed.
  

Inflation Dynamics:

• Domestic Price Pressures:
  A depreciating shilling can contribute to imported inflation—raising the cost of goods such as fuel and raw materials. However, Kenya’s moderated domestic inflation (declining from 6.6% to 3.6%) indicates that effective monetary policies and supply-side measures have helped control price increases despite exchange rate pressures.
  
• Relative Inflation Impact:
  When U.S. inflation peaked and later moderated, the interplay with Kenya’s inflation becomes critical. Lower Kenyan inflation helps preserve the real yield even if the nominal CBR remains high. Additionally, if U.S. inflation falls faster than in Kenya, capital may flow toward emerging markets like Kenya to seek better real returns, provided exchange rate risks are managed.
  

3. Strategic Implications

• Investment Attraction:
  With U.S. rates now higher and the risk premium narrowing, Kenya’s high real yields become more competitive. However, investors must weigh these yields against exchange rate risks. A moderated depreciation trend in later years (e.g., 134.74 in 2024 and 129.25 in 2025) is a positive sign for stabilizing returns.
  
• Export Growth:
  The sustained depreciation of the shilling until 2023 has enhanced export competitiveness by making Kenyan goods cheaper internationally. If the depreciation moderates as observed in 2024–2025, exporters might face a balance between improved purchasing power of local inputs and competitive pricing abroad.
  
• Inflation Management:
  Kenya’s ability to reduce inflation from mid-single digits to around 3.6% has bolstered the real yield environment, even as the nominal exchange rate fluctuates. Continued fiscal discipline and monetary policy stability are essential to maintain this balance and ensure that depreciation does not spiral into runaway inflation.
  

Summary

From a financial analyst’s perspective, the period from 2015 to 2025 illustrates the following key dynamics:

• U.S. monetary policy shifted from extremely low rates and near-zero/negative real yields to a regime of higher rates and positive real yields.
  
• Kenya’s monetary policy maintained high nominal rates to combat inflation, which moderated over time, resulting in stable and attractive real yields.
  
• The exchange rate (USD/KES) showed gradual depreciation—starting around 98 KES per USD in 2015 and rising to a peak of approximately 139.83 in 2023—before moderating in 2024–2025.
  
• Investment and export dynamics:
  – The narrowing risk premium and stable real yields in Kenya, especially in later years, enhance FDI attractiveness, though exchange rate risk remains a key consideration.
  – The depreciation of the shilling has boosted export competitiveness by lowering the international price of Kenyan goods, while domestic inflation control has helped maintain a favorable investment environment.

How Kenyan treasury bond prices and yields relate to broader U.S.–Kenya macro conditions

1. Treasury Bonds in Kenya and Their Pricing Dynamics

Kenyan treasury bonds come with fixed coupon rates, maturities ranging from short to long term, and market prices (clean and dirty). Their yields are determined by several factors: the coupon, the redemption value, the bond’s price, and market liquidity. Generally, when bond prices rise (trading near or above par), yields fall, and vice versa.

2. Macroeconomic Environment: Interest Rates, Spreads, and Exchange Rates

U.S. vs. Kenya Interest Rates and Rate Spreads

• U.S. Environment:
  Over the past decade, the U.S. Fed rate has moved from very low levels (around 0.14% in 2015) to higher levels (approximately 5% by 2023–2025). Inflation has also fluctuated—starting very low, peaking around 8% in 2022, and then moderating—resulting in shifts in the U.S. real rate (Fed rate minus inflation).
  
• Kenyan Environment:
  In Kenya, the Central Bank Rate (CBR) has historically been much higher (around 16% in 2015) and gradually eased to roughly 10.75% by 2025. However, domestic inflation has moderated from about 6.6% to 3.6%, keeping the real rate attractive (around 5.9% in recent years).
  
• Rate Spread (Kenya vs. U.S.):
  The spread—the extra yield Kenyan bonds must offer over U.S. assets—has narrowed from roughly 16 percentage points in 2015–2016 to about 8.6 percentage points by 2023–2025. This narrowing indicates that investors now require a lower premium for Kenyan assets, reflecting improved stability or reduced perceived risks.
  

Foreign Exchange Rates (USD/KES)

• Currency Movements:
  The exchange rate has depreciated over time—from about 98.24 KES per USD in 2015 to roughly 129.25 KES per USD by 2025, with a peak of around 139.83 in 2023. A depreciating shilling increases currency risk for foreign investors, requiring additional compensation (a risk premium) in the form of higher yields on local bonds.
  

3. Correlation Between Treasury Bonds and Macroeconomic Conditions

Relationship Between Yields, Prices, and Interest Rate Spreads

• Yield Sensitivity:
  When the U.S.–Kenya spread is wider—as seen in earlier years—a higher risk premium is demanded by investors, which translates into higher yields on Kenyan treasury bonds. Bonds with longer maturities or those issued during wider spread periods tend to show higher yields to attract investors. Conversely, as the spread narrows (from around 16% to approximately 8.6%), the required extra yield diminishes. In this environment, if demand improves, bonds can trade at or above par, reducing yields.
  
• Bond Pricing Dynamics:
  Treasury bonds trading near par or at a premium (i.e., clean prices close to or above 100) generally have yields that reflect the current risk environment. For example, shorter-term bonds with attractive coupons and lower trading spreads may see their prices supported by improved investor sentiment when the rate spread narrows. Conversely, if the spread were wider, investors would demand higher yields, pushing bond prices lower.
  

Impact of Currency Movements

• Exchange Rate Risk:
  The long-term depreciation of the Kenyan shilling increases the risk for foreign investors. To offset this risk, yields on treasury bonds are often higher. However, if the currency trend moderates (as observed in 2024–2025 when the USD/KES moves from a peak of about 139.83 to 129.25), the associated risk premium may ease. This easing can contribute to narrower overall spreads and might support higher bond prices.
  
• Investor Behavior:
  A significant depreciation (as seen between 2015 and 2023) makes investors cautious, demanding higher yields to cover potential currency losses. When the depreciation moderates and the rate spread narrows, foreign investors may be more inclined to invest in Kenyan bonds, pushing up prices and further compressing yields.
  

4. Strategic Implications

• Attracting FDI and Portfolio Investment:
  The convergence of a narrowing rate spread and stabilizing exchange rate conditions improves the relative attractiveness of Kenyan treasury bonds. As the risk premium declines, investors are more willing to accept lower yields compared to periods with wider spreads, thereby supporting bond prices.
  
• Export Competitiveness and Domestic Investment:
  A depreciated shilling generally benefits exports by making them cheaper on the international market. However, it also increases the cost of imported inputs, which can pressure inflation. The ability to moderate inflation while maintaining attractive real yields (as seen by the stabilization around 5.9% in recent years) helps sustain economic growth and investor confidence.
  
• Policy Considerations:
  For Kenya, maintaining an optimal balance between controlling inflation, managing the exchange rate, and setting appropriate interest rates is crucial. A stable macroeconomic environment reduces the required risk premium, narrows the U.S.–Kenya spread, and supports higher bond prices—benefiting both public debt management and the broader financial market.
  

Summary

Analyzing the interplay between Kenyan treasury bond prices and the broader macroeconomic indicators reveals that:

• Interest Rate Dynamics:
  The high domestic CBR and its moderation over time, combined with U.S. Fed rate movements, create a dynamic risk premium environment. A narrowing U.S.–Kenya rate spread improves the attractiveness of Kenyan bonds, leading to potentially higher bond prices and lower yields when investor sentiment is positive.
  
• Exchange Rate Effects:
  A depreciating shilling increases risk and typically pushes yields higher to compensate. However, as the depreciation moderates, the risk premium eases, further narrowing the spread and supporting higher bond prices.
  
• Integrated Market Behavior:
  When macro conditions in Kenya (lower inflation, stable real yields, and a narrowing risk spread) improve relative to the U.S., treasury bond prices tend to be higher. Conversely, wider spreads and significant currency depreciation compel investors to demand higher yields, thereby depressing bond prices.