The advantages of investing in bonds.
Shares are high-risk, but can give very good returns or cost you all of your savings, whereas bonds are mostly lower risk and generally not very correlated to stocks and do pay an income. A balance between these securities is usually the best bet, Having a well-balanced portfolio is just as important as having a well-balanced diet. Let us analyze why it pays to invest in bonds. Kenyans have been known to be good at investing in shares but we have a long way to go in relation to bonds, asset backed securities and other modern financially engineered investment vehicles like futures, swaps, forward contracts and so on….
The bond market has witnessed increased liquidity and high turnover due to automation of trading and settlement at NSE, lengthening of the Government bonds maturity to 30 years, and a stable yield curve due to the issuance of benchmark bonds, among other reforms. We all know that vibrant bond market will help the country mobilize long term savings and capital needed to meet the aspirations of transforming Kenya into a middle income country as espoused in the Vision 2030 Economic Blueprint, and this can only be achieved through massive participation.
So what is a bond and how does it differ from shares
These are long term fixed interest securities issued by government and corporate bodies. In effect, they are promissory notes in which the issuer (the borrower) makes an obligation to pay interest at specified times and intervals and to pay back the principal at maturity of the Bond. The holders of bonds get interest even if the issuer does not make profit unlike whilst invested in stocks where bonus are only guaranteed when profits are ample to meet internal financing and at the discretion of the management.
There are many different types of bonds. Treasury Bonds These are debt instruments issued by the Government of Kenya to finance budgetary goals and were introduced in the Secondary Market over 10 years ago. They are available in both the primary market (through auctions) and the secondary market (through the NSE). An investor needs at least Kshs. 50,000 to purchase bonds in Kenya.
Corporate Bonds These are long-term (at least one year and above) debt instruments issued by the private sector . Issuers of this instrument targets high net worth investors who understand technical information about pricing, valuation, yields etc. This implies that this product is not completely open to every individual or institutional investor. Like Treasury Bonds, an investor needs at least Kshs 50,000 to purchase this product. We also have other types of bonds namely Convertible bonds, infrasture bonds, eurobonds and so on
Bonds and stocks are both securities, What are the major difference between the two:
- Stockholders have an equity stake in the company (They are owners), whereas bondholders have a creditor stake in the company (are lenders)
- Bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks may be outstanding indefinitely(Though we have perpetual bonds)
Advantages over shares
- safe haven for your savings– investing in debt is safer than investing in equity because of priority that debt holders have over shareholders. If a company goes bankrupt.
- predictable returns over time– share prices fluctuates over time unlike bonds- during the stock market crisis bonds always out performs shares
- High interest income– bonds pay higher interest than what banks pay on savings accounts. instead of keeping your money in a saving account you better invest in bonds especially if not planning to spend them in any soon
- Diversity in investment- bond provide better avenues for diversification- But the question is just how much should i put in bonds? Quite often you’ll hear an old rule that says investors should formulate their allocation by subtracting their age from 100. The resulting figure indicates the percentage of a person’s assets that should be invested in stocks, with the rest spread between bonds and cash. According to this rule, a 20-year-old should have 80% in stocks and 20% in cash and bonds, while someone who is 65 should have 35% of assets in stocks and 65% in bonds and cash
how do you go about investing in bonds: what are the requirements in kenya ?
Who can invest in Treasury bills in Kenya?
- Resident or non-resident individuals and/or corporate bodies who hold an account with a local commercial bank
- Resident or non-resident individuals and/or corporate bodies who may not have an account with a local commercial bank but invests as a nominee of a commercial bank or investment bank in Kenya
- Resident or non-resident individual and/or corporate bodies that has CDS Account with Central Bank of Kenya
- Any potential investor must have a minimum face value of Ksh.100, 000. Any additional amounts MUST be in multiples of Kshs. 50,000
How and when do I invest?
- Any potential investor must have an active and updated a CDS account at Central Bank of Kenya.
- Treasury bills are sold weekly, with 91 days and 182 days papers being issued in alternate weeks. Each new offer is advertised in the Daily Nation Newspaper on Fridays.
- Investors MUST correctly and appropriately complete Treasury Bills application form available at the Central Bank of Kenya head office Nairobi or any of its branches in Eldoret, Kisumu and Mombasa.
- The duly completed application form must be submitted to Central Bank (or branches) on or before 2.00pm on Thursdays.
- Investors may place their application either as competitive or non-competitive (average) bids. Competitive bidders MUST indicate the desired price/yield and usually understand the movements in interest rates and market conditions. However, such bids may either be accepted or rejected depending on interest rates and liquidity levels. Non-competitive bidders on the other hand only indicate ‘Average’ or ‘Non-Competitive’ in the place of offer price per Ksh 100 in the application forms. Since this category is a price-taker of market outcome (successful weighted average rate), their placement is guaranteed. However, maximum amount one can invest per CDS account per issue/tenor is Ksh 10,000,000.
- Application forms should be deposited in the blue tender boxes marked “Treasury bills” at any branch of Central Bank by 2.00p.m on Thursdays.
for more information.
The bond market turnover increased from Kshs 110 billion in 2009 to over Kshs 480 billion in 2010. Consequently, the bond turnover as a ratio of GDP has increased substantially from 5 percent in 2009 to 17.5 percent in 2010. This is a clear demonstration that our capital market has high potential to support the financing needed to boost our investments.