Looking at the stock market reports on the local dailies and TV business news, one can’t fail to notice that the Treasury Bills and Bonds information is quite insufficient. Actually, most of us don’t understand what they are all about. We presume they are for the government and the wealthy elite. It is very important for one to obtain the necessary information regarding marketable Treasury bills, notes and bonds to enable informed investment.

One of the best ways to diversify one's portfolio is by adding bonds and bills to your asset mix. Traditionally, we view bonds as boring investments that do not give good returns and that burden portfolios. We couldn't be more misled. Sometimes bonds can do better than equities. Adding bonds can reduce portfolio volatility.

When you buy Treasury Securities, you are loaning money to the government, or local municipality. In exchange for the cash loan, the government agrees to repay you--with interest--within a certain period of time. That time period is called maturity. Maturities can range from one day to 30 years depending on the securities you invest in.

Treasury Bonds (T/bonds) are medium to long term government securities sold by the Central Bank on behalf of the Treasury. An investor earns a return during the period of the security and repayment of the face value is made on maturity date. Currently, the T/bonds are for maturity periods ranging from one year and above. Anyone including Individuals, corporate bodies, and non-residents can invest in T/bonds and bills. The minimum amount of bonds that one can purchase is a face value of Kshs.1 million after which, any additional amounts MUST be in multiples of Kshs.50, 000.

On the other hand, treasury bills, which are almost similar to T/bonds, are of a shorter period, from three months to less than a year. They don’t fetch interest on the par value but are usually sold at a discount. They are issued through a competitive bidding process. Let’s say you buy a 13-week T-bill priced at Ksh.9,800. Essentially, the government writes you an IOU for Ksh.10,000 that it agrees to pay back in three months. You will not receive regular payments as you would with a coupon bond, for example. Instead, the appreciation - and, therefore, the value to you - comes from the difference between the discounted value you originally paid and the amount you receive back (Ksh.10,000). In this case, the T-bill pays a 2.04% interest rate (Ksh.200/Ksh.9,800 = 2.04%) over a three-month period.

For one to purchase T/bond or bills he is supposed to have a Central Depository System account just like any other stock trader. An application form is then filled, choosing the desired way one wants to bid quoting the price (either competitive or non-competitive).  This is usually done at any central bank branch in the country. At the end of the trading period one can check with the bank whether his bid was successful and arrange to make payments in time.

Treasury securities have several benefits that even the most risk averse investor will consider lucrative enough.  Guaranteed by the full faith and credit of the government, Treasury securities are recognized as the safest investment available. All Treasury securities have a definite pay back and one is certain of payment at the maturity date.

Since Treasuries are exempt from most state and local taxes, their real total return may be greater than returns of fully taxable securities with slightly higher coupons such as preference shares in blue chips companies. Income derived from Treasury securities is tax exempt in most countries but it may be subject to the other taxes (such as withholding tax) depending on the country’s regulations. An investor should consult his tax adviser specific regulations.

The secondary market for Treasury securities is the most liquid secondary market in most countries. The spread between bid and offer prices is considerably narrower than other securities, making most Treasury issues easy to purchase and sell. Any fixed income security sold prior to maturity may be subject to a substantial gain or loss.

Although treasury securities are almost risk free, their yields are much lower than stocks. Due to the lack of default risk, Treasury securities typically offer lower rates than most other securities. Like all securities, Treasuries are susceptible to fluctuations in interest rates. If interest rates rise, bond prices will decline despite the lack of change in the coupon and maturity. The degree of price volatility tends to increase with the length of the maturity and decreases as the size of the coupon decreases.

Some Treasury securities carry call provisions that allow the bonds to be retired prior to stated maturity. Thus when prevailing interest rates drop, Securities will typically be called, making reinvestment less desirable for the buyer. Investors should understand the existence and specifics of call options associated with Treasury securities.

It's easy to understand Treasury securities, and their simplicity can be very reassuring in today's complex financial world. But as much as one would like to manage his/her own bonds and bills, it’s important to have an investment manager looking after your investments. This is much safer because it’s a tedious process for one to manage with limited time and information. Investing in treasury securities can be almost as complex as stock investing if left unattended to professionally.

For those patriots out to see their country grow and reduce external borrowing, Treasury securities are a sure way to finance your government’s public spending budget. Investing in these securities is the best thing one can do to save money for the future and get an interest on it concurrently. All these benefits are devoid of the risk of losing money in the turbulent stocks market and incurring extraneous bank charges on savings.