May 24, 2024

Analyzing the Surge in Demand for Treasury Bonds

Treasury Bonds

Kenya’s recent Treasury bond auctions have been a hotbed of activity, with investor demand significantly exceeding the government’s offerings. The latest example comes from the auctions for the FXD1/2023/005 and FXD1/2024/010 bonds.

The government offered KES 25 billion worth of bonds, but investors responded with a staggering KES 47.79 billion in bids – a whopping 191.16% oversubscription. 

While the Treasury ultimately accepted KES 45.85 billion, this episode highlights the strong appetite for Kenyan government debt. This oversubscription is a good sign of investor confidence.

Several factors are fueling this oversubscription trend:

  • Tempting Yields: Treasury bonds are currently offering some of the most attractive returns in the market. The 10-year bond, for instance, boasts a record-breaking yield of 19.397%. This is particularly enticing when compared to potentially lower returns on other fixed-income securities.
  • Safety First: Government bonds are widely considered low-risk investments. Backed by the Kenyan government’s creditworthiness, they offer stability and security. This becomes even more attractive during times of economic uncertainty or market volatility, when investors seek safe havens for their capital.
  • Diversification Powerhouse: Savvy investors use Treasury bonds to diversify their portfolios and mitigate risk. By incorporating these bonds, they can offset potential losses in riskier asset classes like stocks, achieving a more balanced and resilient investment strategy.
  • Liquidity Lifeline: Treasury bonds are highly liquid assets. They can be easily bought or sold in the secondary market, providing investors with the flexibility to adjust their holdings based on changing market conditions or investment goals. This liquidity is crucial for investors who might need to access their funds before the bond matures.
  • Market Optimism: Positive economic indicators, political stability, and sound central bank policies can all contribute to a bullish sentiment towards government bonds. This optimism translates into higher investor confidence and increased demand during bond auctions.
  • Strategic Debt Management: The Treasury might be strategically offering a smaller amount of bonds than the market demands. This allows them to control their debt levels and avoid excessive borrowing costs, while still meeting their financing needs.

Treasury bonds are considered a safer investment than shares and saccos. They offer the potential for attractive returns and are safe investments for retail and institutional investors.

Most treasury bonds pay a fixed rate of interest every six months until maturity, and investors receive the value at the end of the term.  The minimum investment is Kshs. 50,000. 

To purchase treasury bonds in Kenya, you must meet certain requirements. You must have a copy of your passport photo, a national ID or original passport, and a bank account in Kenya.

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The yields for other Kenyan government bonds also reflect the attractive interest rate environment. The 6-year bond offers a yield of 19.204%, while the 7-year and 5-year bonds offer yields of 19.547% and 19.140% respectively. 

Here’s how you can buy Treasury bonds in Kenya: 

  1. Opening a Central Depository System (CDS) Account: Before you can participate in Treasury bond auctions or trade bonds in the secondary market, you need to open a CDS account with the Central Depository & Settlement Corporation (CDSC). You can open a CDS account through a licensed stockbroker or investment bank. 
  2. Participating in Primary Auctions: The Central Bank of Kenya conducts regular auctions for Treasury bonds, where investors can bid for bonds directly. To participate in a primary auction, you need to submit a bid through your licensed stockbroker or financial institution before the auction deadline. Your bid should specify the amount of bonds you want to buy and the interest rate (yield) you are willing to accept. 
  3. Buying Bonds in the Secondary Market: If you prefer to buy Treasury bonds after the primary auction, you can do so in the secondary market through licensed securities brokers. You can place an order with your broker to buy specific Treasury bonds at prevailing market prices. 
  4. Monitoring Bond Prices and Yields: Before buying Treasury bonds in the secondary market, it’s essential to monitor bond prices and yields to make informed investment decisions. You can access information on bond prices, yields, and trading volumes through financial news websites, investment platforms, or directly from your broker. 
  5. Settlement and Payment: Once your bid in a primary auction is successful or you buy bonds in the secondary market, settlement and payment are typically handled through your CDS account. The purchased bonds will be credited to your account, and the corresponding funds will be debited from your linked bank account. 
  6. Maturity Proceeds: Investors who may have maturities on specific settlement dates, have the option of performing a netting action by activating the netting flag which can be found in the investor portal or mobile application under CSD accounts profile. By activating this flag, any corporate (coupon payment or redemption) that coincides with a given bid on a settlement date will be netted off and any refund or top up will be applied.