Investing in T-Bills: Everything You Need to Know

As an investor traversing the money-making jungle, there are numerous investing vehicles that you can use. However, to pick the right vehicle for yourself you need to understand your investment objectives and goals. If your investing objective is to invest in stable, low-risk, high-liquidy vehicles then Treasury bills might be the vehicle for you.

This article outlines everything you need to know about Treasury bills.

Read Also: Advantages of Investing in Treasury Bonds

What are Treasury Bills?

When the government wants to raise money they use financial instruments such as Treasury bonds and bills. Treasury bonds are long-term investments. Treasury bills on the other hand are short-term investments.

The Kenya government offers Treasury bills every week. The maturities for these bills are 91 days, 182 days, and 364 days. Once you invest in a Treasury bill you can get your money back within three, six, or twelve months depending on the bill you invest in.

How Do T-Bills Work?

Unlike bonds Tbills do not pay interest instead they are sold at a discount and the investor cashes out the face value of the bill. 

The least an investor needs to buy a Tbill is Ksh100,000. Therefore if the government is selling a bill that is worth Ksh100,000 then depending on the discount offered, the investor will pay less than Ksh100,000 then after the maturity they will earn the full Ksh100,000.

For instance, assuming the government is offering a 10% discount on the bond and the investor wants to invest Ksh100,000 then the investor will deposit into the government’s account Ksh90,000 but after maturity, the government will deposit in their account Ksh100,000.

Read Also: Frequently Asked Questions About Treasury Bonds

Auction Process

T-bills are sold through an auction. The Central Bank of Kenya auctions these bills every week. To have a look at the weekly auctions check out Central Bank of Kenya’s website.

Once you find a Tbill you would like to invest in then you should fill in the application form. Through the application form, you get two options to choose how you want to submit your bid. You can choose the competitive bid or the non-competitive bid.

In the competitive bid, you get to state your preferred return rate while in the non-competitive bid, you get what the CBK Auction Management Committee settles on as the discount for that bill. 

After bidding make sure to check their website to see if your bid has been accepted. CBK will also send you a text message through your registered number to inform you of the decision on your bid. Once your bid has been accepted you need to ensure you deposit the amount into the CBK account before the following Monday at 2:00 PM. If Monday is a holiday then you have to deposit on Tuesday before 2:00 PM.

Note that the published rates are final and cannot be contested.

Maturity Periods

The maturity period is between three months, six months, and a year. Ensure you choose the maturity period that works for you as an investor. Also, consider factors such as inflation and fluctuating interest rates when deciding the best period to commit your funds.

How Investors Earn Returns

Investors make their money from buying a bill at a discount. After the maturity of the bill, the government then pays the full face value of the bill.

CBK deposits the face value of the bill into the investors' commercial account on the date of maturity. The CDS account for the investor is also admitted at the same time and a statement is sent to the investor that shows them the new position. 

Read Also: Investing for Beginners: How to Get Started

Benefits of Investing in T-Bills

T-bills are a great investment for an investor who is looking for security and liquidity. Here are some advantages of investing in T-bills.

Low Risk

One of the great things about Tbills is that they are low-risk. You loan the government your money. They sell the bill to you at a set discount, at the end of the maturity period the government remits the face value of the bill into your account. 

The returns of the Tbills are not tied to market performance, inflation, or change in interest rates. Once your bid has been successful you know how much you will make from the investment and what you need is to wait for maturity.

Such an investment is a great instrument for beginner investors who are risk averse. 

Government Backing

Another benefit of investing in T-bills is that they are government-backed. Essentially investing in Tbills you are lending the government money. 

For a start, the government does not want to default in paying any of its debtors because it affects their capability to raise money in the future. If the government fails to pay a given bill, then investors will be alarmed and will stop buying government bills. Hence the government has to do its best to pay investors so that it can raise more money when it needs to.

Secondly, the government will only not pay up if it is going through a debt default. A debt default is something the government avoids at all costs. And if you are making losses with Tbills then there are very few other investments that would be making money at that moment.

Read Also: 15 Investment Terms You Need to Know Before Investing

High Liquidity

T-bills have high liquidity since they are short-term investments. You get your money back in either 91 days, 182 days, or 364 days. This allows individuals as well as institution to manage their cash flow efficiently.

Risks and Considerations

Despite the stability that comes with Tbills there are a few risks that Tbills might be exposed to,

Interest Rate Risk

Interest rate risk refers to the potential of rates fluctuating affecting an investment. Even though government bills are not paid out in interest rate rates the discount is set at the beginning of the investment and the investor only gets paid the face value of the investment, interest rate risk still affects Tbills. When the interest rates are rising, investors are hesitant to invest if they expect the interest rates to rise. They hold back for fear of missing out on a higher discounted bill. 

Inflation Risk

Inflation is another risk that Tbills investors have to contend with. With rising inflation, the value of the investment falls. If for instance, an investor locks a bill at a 5% discount and iflation rises above 5% then the investor’s invested sum starts to lose value and the investor might make losses though not on the face value but in the value of the money they will earn at the end.

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Tax Implications of T-Bill Investments

Investing in T-bills will qualify you to pay a 15% withholding fee on the return you make. CBK will be withholding 15% of the profit you make as it is an authorized withholding agent by the KRA.

Wrapping Up

T-bills are investments for investors who are looking for liquidity and stability. The liquidity of Tbills allows businesses as individuals to invest for a short while until they need the money. As an individual, it is a great entry point to investments especially fo you are risk averse.