From your first KES 50,000 to a full ladder

When you buy a Treasury bond you are lending money to the Government of Kenya. In return it pays you a fixed coupon twice a year and returns your face value on the maturity date. A Treasury bill works differently: there is no coupon at all. You buy it below face value and receive the full face value at maturity — the gap is your interest.

Three families matter in Kenya. FXD — fixed coupon bonds, 2 to 30 years. IFB — infrastructure bonds, which are exempt from withholding tax and therefore usually the highest net yield on the board. T-bills — 91, 182 and 364 days, auctioned weekly.

Three things sit between the headline number and your bank account.

Withholding tax. 15% on bonds shorter than ten years, 10% on ten years and longer, 0% on infrastructure bonds. Tax applies to coupon income only, never to the principal returned at maturity.

The price you pay. A coupon is a percentage of face value, not of what you paid. Buy a 16% bond at 108 and you are earning 16 shillings on 108 spent, not on 100. Yield to maturity accounts for this; the coupon alone does not.

Accrued interest. Buying between coupon dates means paying the seller for interest already earned. The quoted “clean” price excludes it; the “dirty” price you actually settle includes it.

T-bill rates are quoted as a discount rate, and it misleads in both directions at once. A 91-day bill quoted at 8.80% prices at about 97.81 per 100. You earn 2.19 on 97.81 spent over 91 days, which annualises to roughly 9.30% — higher than the quote. Then 15% withholding tax takes it down to about 7.87% — lower than the quote.

The gap widens with tenor, because a 364-day bill prices near 91 rather than 98, so the same discount is earned on a much smaller outlay. Only the net figure is comparable to a bond's net yield.

Register at dhowcsd.centralbank.go.ke with your National ID, KRA PIN and bank details. Approval usually takes one to three business days. There is no broker and no commission — you deal with the Central Bank directly.

At the auction you choose non-competitive or competitive bidding. Non-competitive means you accept the weighted average rate the market clears at, and is available up to KES 50 million — this is what almost every retail investor should use. Competitive bidding means naming your own rate, and if you bid too aggressively you simply get nothing.

Bids close before the auction date — Thursday 2:00pm for bills. Once allotted, you must fund the settlement by the value date or forfeit.

Putting everything into one bond creates two problems: your entire holding is exposed to one day's rate, and the money is locked until one date that may not be when you need it. A ladder solves both by holding several bonds maturing in different years.

The real power is maturity matching. If school fees fall due in 2033, holding a bond that matures in 2033 means the principal arrives when the invoice does — no selling into a bad market, no guessing. The same logic builds a retirement income or an emergency reserve.

Government bonds carry minimal credit risk in shillings, but they are not risk-free. Rates rise, prices fall — sell early after a rate rise and you lose money. Inflation erodes fixed coupons: 12% net against 6.4% inflation is about 5.6% in real terms. Liquidity is thin for many issues, so selling quickly may mean selling cheaply.

The practical defence is simple: buy what you can hold to maturity, and match maturities to when you actually need the money.