How to get continuous income from treasury bills

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

29 October 2023

Last week’s article about investing in treasury bills has elicited a number of responses. Many readers are wondering whether one can withdraw the money if an emergency arise before the T-Bill matures.

The answer is yes. The Central Bank of Kenya (CBK) can buy back your T-Bill through a process called re-discounting. But you don’t get the same interest rate as you had purchased. Usually, it is about a half or less.

Alternatively, you can sell your T-Bill to a third party at a mutually agreed price. If you go this route, bear in mind that the buyer will have to wait for whatever period is remaining on the bill before they can get the cash. Also, remember that there is a new auction at the CBK every week, so, you would need to give a very good price – lower than the Thursday market level.

For these reasons, it is not wise to place all your savings in one T-Bill. It is better to spread the purchases on a weekly basis. That way, you also take advantage of sudden upward swing in the interest rates and hedge against downward drops.

Suppose you can raise the minimum Sh50,000 every week. At the current 15 per cent interest, you would be required to pay Sh48,467.88 for the smallest T-Bill. You then commit to buy the bills every week for the next 12 weeks. That comes to a total of Sh581,614.56 invested.

Then, on the 13th week, the first bill will mature and you re-invest it in the process called “rolling over”. Let’s assume that the rate remains at 15pc; instead of paying you Sh50,000, the CBK would take Sh48,467.88 to put in a new Sh50,000 bill and then pay you the outstanding balance of Sh1,532.12. (Now you can see why some people believe the interest is paid up-front.)

From that point onward, you keep rolling over your weekly bills as they mature and every week you get Sh1,532.12 paid to your bank account. Thus, your Sh581,614.56 investment in T-Bills is now paying you a continuous stream of Sh1,532 every week without fail. All you need to do is indicate on the DhowCSD system that you wish to roll-over the T-Bills.

This is now a more encouraging investment when you can see you returns coming into your bank account every week. The only long wait is the first three months. Furthermore, if the rates start dropping, you can stop rolling-over the bills and get back your full Sh50,000 weekly.