What are government securities?
Government securities refer to a set of instruments that are used by government to borrow money from the public. Government borrows money when its income falls short of public spending needs.
In Kenya, government securities include treasury bills and bonds. Treasury bills are used to borrow money for short periods that do not exceed one year. Currently, the government borrows money through treasury bills from three specific periods, that is, 91, 182, or 364 days. On the other hand, treasury bonds are used when the government needs to borrow money for longer periods that exceed one year. Using treasury bonds, the government borrows for periods of 2, 5, 10, or 15 years.
Government income comes principally from tax and non-tax revenue. Other sources of finances for public expenditure include donor funding as well as borrowing from abroad.
The government securities are used for domestic borrowing or more specifically for borrowing that is denominated in the domestic currency. In practical terms, treasury securities may be regarded as paper assets that are created by the government. By issuing the securities, the government exchanges the paper assets for cash from the people, institutions, or agencies who are regarded as investors.
When the borrowing period expires, the government returns the money borrowed together with interest earned to the investors
Why are government securities considered risk free?
Government securities carry the least risk relative to other assets because they are backed by the strength, full faith and credibility of the borrowing state. States are believed to have the perpetual capacity to levy taxes. Because of that, they offer timely and predictable payment of interest and principal, hence the zero default risk. In Kenya, government securities are issued by the Central Bank Of Kenya (CBK) on behalf of government.
Can the ordinary man and woman invest in government securities? Or it is a preserve of just a few?
Investing in government securities is open to everyone who possesses or has access to savings and is ready to lend to the government so as to earn interest. Individuals can invest in treasury bills and bonds for amounts starting from as low as Ksh 3000, (M-Akiba).
However, investment in government securities is dominated by commercial banks, offshore (non-resident) investors, insurance firms, as well as pension and provident funds.
How does one invest in treasury bills and bonds?
The sale of treasury bills and bonds is conducted through an auction. This means that the interest rates are market determined. Participation in the primary auctions is done through a set of Investment Banks and stockbrokers.
Investors who conduct their banking with non-primary dealer banks can still invest in government securities through their specific commercial banks, which work with the primary dealers to facilitate the opening of investors’ accounts with the CBK. Prior to every auction, the Central Bank publishes an invitation to bid for treasury bills and bonds on the CBK website and newspapers. The results from the auctions are also published through the media.
Are there any specific advantages for investing in government securities?
Oh yes! Investors in treasury securities earn interest income, which varies with the duration of the treasury bill or bond holding. Moreover, the return on investments in government securities is virtually guaranteed.
Government securities present an option for investors who wish to diversify their assets by including relatively low risk instruments. Being assets that are relatively easy to convert to cash, the securities can be used as collateral for loans.
In addition, they are flexible investments because investors who wish to access their money before the maturity period can do so by turning them over to CBK for cash through a process called “re-discounting”. However, the impatient investors who access the rediscounting facility end up forfeiting a portion of the interest that they would otherwise have earned if they were to hold the securities until maturity.