Step-by-step guide on how to trade in gov't securities [Treasury bills & bonds]

Government securities are debt instruments issued by a government to finance its spending needs
Trading in government securities in Kenya is straightforward and can be done through various channels
Investing in government securities contributes to the country's development and can provide a steady income

Government securities are a popular investment option for those looking for a safe and reliable way to grow their money.

What are government securities?

Government securities are debt instruments issued by a government to finance its spending needs.

In simple terms, when a government needs to raise money for projects like building infrastructure, paying off debts, or funding public services, it borrows money from the public by issuing securities.

In return, the government promises to pay back the borrowed amount with interest over a specified period.

An imagery showing treasury bills and bonds Pulse Live Kenya

There are two main types of government securities:

Treasury Bills (T-Bills): These are short-term securities that mature in less than a year, usually in 91, 182, or 364 days. T-Bills are sold at a discount and do not pay periodic interest. Instead, you make a profit by buying them at a lower price and receiving their face value at maturity.
Treasury Bonds (T-Bonds): These are long-term securities with maturities ranging from two to thirty years. Unlike T-Bills, T-Bonds pay periodic interest, usually semi-annually, until they mature. At maturity, you receive the face value of the bond.

How to trade in government securities

Trading in government securities in Kenya is a straightforward process, and it can be done through various channels such as banks, brokers, or directly through the Central Bank of Kenya (CBK). Here’s how you can get started:

Open a CDS account: To trade in government securities, you need to open a Central Depository System (CDS) account with the Central Bank of Kenya (CBK). This account acts like a digital wallet where your securities will be held. You can open a CDS account through your bank or directly at the CBK.
Participate in auctions: The CBK regularly holds auctions where you can bid for T-Bills and T-Bonds. You can choose the type of security you want to invest in and the amount you wish to invest. There are two types of bids:

Competitive bid: You specify the return (interest rate) you want. However, there's a risk that your bid might not be accepted if it's too high.
Non-competitive bid: You agree to accept the average interest rate determined by the auction. This type of bid guarantees that your order will be accepted.

The Central Bank of Kenya (CBK) Google

3. Purchase securities: If your bid is successful, you will purchase the securities by paying the amount you bid. For T-Bills, you’ll pay less than the face value (since they’re sold at a discount), and for T-Bonds, you’ll pay either face value or a price determined at the auction.

4. Receive interest payments: If you invest in T-Bonds, you’ll receive periodic interest payments until the bond matures. T-Bills, on the other hand, don’t pay periodic interest; instead, you make a profit when the government pays you the face value of the bill at maturity.

5. Sell your securities (Optional): You don’t have to hold your securities until they mature. If you need cash or want to realise your profit early, you can sell your T-Bills or T-Bonds in the secondary market through your bank or broker.

How profit is made

Profit from government securities comes in two forms:

Interest payments: For T-Bonds, you earn interest payments periodically. This is a fixed amount, making T-Bonds a stable source of income. For example, if you invest in a bond with a 10% interest rate, you’ll receive 10% of the bond’s face value as interest each year.
Capital gain: For T-Bills, the profit is made through the difference between the purchase price and the face value.