Treasury bonds: the coupon is not the yield

Treasury bonds are where Kenyan savers get the best rates on offer and the most ways to misread them. Two things cause most of the confusion.

Coupon and yield are different numbers

The coupon is printed on the bond and never changes. A bond with a 13% coupon on KES 1,000,000 pays KES 130,000 a year, for its whole life, whatever happens afterwards.

The yield is what you earn given what you paid. When a bond is first sold at auction it is priced at par, so coupon and yield are the same — which is exactly why they get treated as interchangeable.

They part company at a reopening. The Treasury frequently sells more of a bond it issued years ago rather than creating a new one. The coupon is already fixed, so the only way to price it for today's market is to adjust what you pay. If rates have risen since, you buy below face value, and your yield is above the coupon. If they have fallen, you pay above, and your yield is below it.

So on a table of auctions, a new issue shows coupon and yield matching, and a reopening shows them apart. If every row matches, something has gone wrong — usually two columns have been swapped.

The tax depends on how long the bond runs

From the Central Bank's own FAQ on government securities:

• 15% withheld on Treasury bonds with a tenor up to 9 years
• 10% on bonds of 10 years or more
• Infrastructure bonds are exempt — no withholding on the interest at all

Three different numbers. Applying one to all three is wrong twice, and the error is large enough to reorder a list.

Worked through, with coupons paid twice a year and each one taxed as it arrives:

Read the last two rows again. The infrastructure bond quotes 1.2 points lower and pays more, because nothing is withheld from it. That is the single most useful fact about Kenyan government paper, and it is invisible on any table that lists quoted rates alone.

Coupons arrive twice a year

Kenyan Treasury bonds pay semi-annually. That matters twice over: the money arrives in instalments you can do something with, and each instalment is taxed as it lands. A yield that assumes one annual payment understates what a reinvesting holder actually gets.

The practical side

• Minimum KES 50,000 for an ordinary Treasury bond; KES 100,000 for an infrastructure bond.
• Bought at auction through a commercial bank or the Central Bank's DhowCSD, or on the exchange's secondary market at whatever it trades for that day.
• You are not locked in, but selling early means selling at market. If rates have risen since you bought, the price has fallen, and a bond sold early can return less than you put in even though it would have paid out in full at maturity.
• The tenor is on the bond's own name. FXD1/2018/020 is a twenty-year bond, IFB1/2023/017 a seventeen-year infrastructure bond. Published tenor columns are not always reliable — we have seen the same bond listed with two different tenors in two different years — so the code is the thing to trust.

One caution about rate tables

Bond auction data is published as history, not as a live feed. A high rate from a year ago is still a real rate — it was true then — but it is not available to you now, and in a year when rates have fallen it will sit at the top of any list sorted by size alone.

On Ipahco every rate carries the date it was true, and the list sorts current figures above stale ones rather than purely by the number. An old rate is still shown, because a stale figure is still the best anyone knows. It just is not allowed to pretend to be today's.