Government bonds — Treasuries, gilts, KES T-bills — Bonds Module 6

Government bonds are the foundation of every fixed-income market. They define the risk-free rate at every maturity, they are the deepest and most-liquid instruments in their respective currencies, and they form the collateral that backs trillions of dollars of repo, derivatives margin, and central-bank operations. A serious fixed-income analyst begins with a working knowledge of how governments actually issue debt.

US Treasury issuance

The US Treasury issues bills (under 1 year, zero coupon, sold at a discount), notes (2-10 years), and bonds (20-30 years), plus inflation-protected TIPS and floating-rate notes. Issuance is by single-price uniform-price auctions held on a published quarterly calendar. Primary dealers — currently around 25 firms designated by the New York Fed — are obligated to bid at every auction and stand ready to make markets. Their privilege: direct access to the Fed's open market operations.

On-the-run versus off-the-run

The most recently issued Treasury of each tenor is the 'on-the-run' issue. It trades with the tightest bid-ask spread and the highest volume because it is the standard hedging instrument for dealers and the de facto benchmark in pricing. The previous issue is 'off-the-run' — slightly less liquid, slightly higher yield. The 1-3 basis point spread between on-the-run and off-the-run captures the liquidity premium, which widens dramatically in crises (in March 2020 it spiked over 30 bps before the Fed intervened).

Other major government markets

German Bunds: the benchmark of euro-denominated fixed income. Spreads of peripheral euro sovereigns (Italian BTPs, Spanish bonos) over Bunds gauge euro-area fragmentation risk.
UK Gilts: the September-October 2022 crisis after the Truss/Kwarteng mini-budget showed how fast even a developed-market gilt market can dislocate when fiscal credibility erodes.
Japanese JGBs: long suppressed by Bank of Japan yield-curve control; the 2024-25 unwind has been a major macro story.
Chinese government bonds: now the second-largest sovereign market by outstanding stock; partially accessible to foreign investors through Bond Connect.

Kenyan T-bills and T-bonds

CBK auctions T-bills weekly (91-day, 182-day, 364-day tenors) and T-bonds monthly (2-, 5-, 10-, 15-, 20-, 25-year tenors). Auctions are multi-price by default — successful bidders pay their own bid prices, rather than a single market-clearing price. This convention has been the subject of reform debate because it dis-incentivises aggressive bidding and is widely thought to widen yields. CBK has experimented with switch and tap auctions to manage redemption profiles.

The Kenyan T-bond market is largely retail-and-bank dominated, with limited foreign participation outside the eurobond market. Average daily secondary turnover is modest by international standards, which is why CBK has invested in the DhowCSD trading platform to improve transparency and broaden participation.

Why governments default less than they should

A sovereign with its own central bank, in its own currency, with a willingness to use that printing press, faces a default decision rather than a default necessity. The choice not to default is political. This is why developed-market local-currency bond yields embed mainly inflation risk and term premium rather than default risk. The picture changes radically for foreign-currency (eurobond) issuance — see Module 11.

STRIPs and zero-coupon Treasuries

The US Treasury permits dealers to 'strip' a coupon bond — separating each coupon payment and the principal repayment into individually tradable zero-coupon securities. STRIPs are useful for liability matching and yield-curve construction. Many other governments (UK gilts, German Bunds, Kenyan T-bonds) have similar mechanisms.