Tag: Bond Watch

Benchmark yield can breach the 6.4% mark

Banking & Finance

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The bond market continues to wait for the much needed support from the central bank even as yields nudged the 6.4 percent-mark again this week. The benchmark yield closed the week at 6.39 per cent, up four basis points from the previous week.

One of the two contributing factors to the rising yields — the US treasury yields — did soften this week. The 10-year US treasury yield came down all the way to 1.55 per cent last week from 1.64 per cent the week before. However, crude prices, that have been keeping pressure on the domestic bond yields, continued to remain at the higher levels last week. Brent price crossed $86/barrel before closing the week near the $84/barrel mark.

Higher cut-off

Moreover, the cut-off rate on the variable rate reverse repo auctions continues to remain high. The central bank conducted a seven-day VRRR auction wherein the cut-off came in at 3.99 per cent. Earlier this month, the cut-off on a seven-day VRRR auction had come in at 3.61 per cent. The RBI has also announced a 28-day VRRR auction next week, indicating a higher tenor. Market participants say although the central bank’s stance on liquidity was made clear during the monetary policy and a hike in quantum was expected, an increased tenor does not help under the current market conditions where nothing is helping the yields.

Vijay Sharma, Senior Executive Vice-President at PNB Gilts opines that the RBI’s support to bond market is missing currently. “Recently, there was an announcement for VRRR auction that had a higher tenor of 28 days. All this seems to indicate that the central bank is still not uncomfortable with the current level of yields. The market has lost its momentum and till the point in time that you see a helping hand from the RBI, you may continue to see the yields at these levels. The market did attempt a recovery but lost its mojo quickly. With each and every day that the central bank is delaying its comeback, the chances of 6.4 per cent level on the benchmark yield getting breached are increasing. The only thing that was finding some sort of favour from the market was the floating rate bonds. With the central bank conducting a massive switch auction, even the demand for FRBs have taken a hit,” he said.

Next week, bond markets across the world will be keenly eyeing the US Fed meet where it is expected to announce unwinding of its bond-buying programme.

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Sovereign bond yields continue to harden on rising crude price, treasury yields

Banking & Finance

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There seems to be no respite for G-sec yields even as crude prices and the US treasury yields continue to rise. The benchmark yield closed at 6.36 per cent, after having nudged the 6.4 per cent levels where a lot of buying support emerged.

After having closed below the $85-dollar mark, Brent crude has continued to persist above this level this week, even touching the $86-dollar level. On the other hand, the 10-year US treasury yield hovered very close to the 1.7 per cent mark compared to last week’s 1.57 per cent level.

On the domestic front, the Reserve Bank of India (RBI) released the monetary policy minutes. Market participants say, the minutes were fairly balanced and did not present any element of surprise.

However, with the benchmark yield hovering close to the 6.4 per cent mark, expectations were building up in the market that the Central bank would spring into action and announce some sort of bond buying that would help calm the yields.

The yields even saw some softening on Thursday on this account, having cooled three basis points to 6.33 per cent. However, since there was no announcement, the benchmark yield edged higher and closed at 6.36 per cent on Friday.

Crucial support

Dealers say that the 6.4 per cent level is crucial and despite the buying support seen in recent times, things could go south if oil prices continue to bother the market.

Siddharth Shah, Head of Treasury at STCI Primary Dealer opines that high crude prices and US treasury yields are still putting pressure on yields and these two variables are the cause for the bearishness in the domestic bond market.

“Many investors have been keenly waiting for the benchmark yield to hit the 6.4 per cent and we saw buying support coming in at these levels this week. When the yield was hovering close to this level, there was strong anticipation in the market that there would be some sort of action from the RBI in the form of bond buying, either through OMOs or through twist. Since nothing materialised, we saw the yields harden on Friday.

As far as the MPC minutes are concerned, there was no surprise. I expect the benchmark yield to find support at around 6.4 per cent but if oil prices continue their upward momentum, we could possibly see 6.5 per cent levels around which there would be expectation of Central bank support coming in by way of announcement of OT etc,” he said.

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3 things to look at before you invest in NCDs

Personal Finance

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Of late, several NCD (non-convertible debenture) issues have been coming in the market. The current low interest rates on bank fixed deposits add to the appeal of these NCDs (or bonds) – both in the new issues as well as those trading in the secondary market.

If you are looking to invest in NCDs to better your debt returns, here are a few points to note.

Return metrics

The fixed coupon or interest rate, calculated on the face value of the bond is what an investor receives periodically (say, quarterly, half-yearly or annually) in the form of interest income. This is the ‘return’ most investors usually focus on. If you invest in an NCD in the primary issue and stay invested until maturity, then the periodic coupon or interest indicates your investment return.

Alternatively, if you buy an NCD in the secondary market and stay invested until maturity, then you must focus on the YTM (yield to maturity) rather than the coupon rate as the correct indicator of your return. The YTM takes into account not just the periodic coupons but also the price at which the bond is bought and redeemed to arrive at the total return. Let’s take an example. Secondary market data from HDFC Securities shows that AAA-rated Tata Capital Financial Services bonds (series – 890TCFSL23 – Individual) priced at ₹1,123 per bond, with a residual maturity of 2.07 years offer a coupon of 8.90 per cent and YTM of 6.79 per cent. A YTM lower than the coupon implies that a bond is trading at a premium. That is, the current market price of the bond is greater than its face value. The latter is what will be paid to you on maturity. In the prevailing low interest rate environment, an 8.9 per cent coupon bond commanding premium pricing is hardly surprising.

Then, there are NCDs that come with a call or put option. Callable bonds give the issuer the right to call back the bond before its maturity by paying back the principal. Putable bonds give the investor an option to exit before maturity and receive the principal. In case of NCDs with a call option, the appropriate return metric to look at is YTC (yield to call) and not YTM. The YTC is the return that an investor gets if the bond is held until the call date. Only very few retail NCDs come with such an option.

Exit or not

While NCDs get listed on the stock exchanges and provide the possibility of an exit option, not many can be bought and sold as easily as shares. This is due to the lack of adequate trading volumes for many NCDs in the retail segment. In such a case, one must be prepared to stay invested until maturity.

Once an NCD lists on the exchanges, it may trade at a price different from its issue price. Over time, the value of the bond will fluctuate in response to factors such as interest rate changes and ratings upgrades or downgrades. So, if you sell a bond before maturity, your final investment return will be impacted by the difference between the selling price versus the purchase price of the bond. This could result in a capital gain or loss for you. Today, with interest rates expected to rise, albeit not immediately, the existing lower-coupon bonds carry the risk of depreciating in value over time resulting in a possible capital loss when sold.

Taxation

The coupon or interest received from NCDs is taxed at your income tax slab rate. Short-term capital gains are taxed at your slab rate and long-term gains at a flat 20 per cent rate with indexation benefit. Capital gains on sale of NCDs that have been held for more than a year in case of listed NCDs and more than three years in case of unlisted ones are treated as long-term in nature.

NCDs in the retail segment quote at their dirty price. That is, the quoted market price is inclusive of the accrued interest on them.

According to Nimish Shah, CIO, Waterfield Advisors, when an NCD is sold, the differential between the sale price and the purchase price is segregated into two parts – capital gains and accrued interest – for taxation purposes. Let’s say, you buy a bond with a coupon of 8 per cent per annum (paid semi-annually) at a face value of ₹100 in January. Suppose this bond is trading at price of ₹110 on March 31. Since the first coupon payment is due in June, the accrued interest by March-end is ₹2. The difference between the sale and purchase price of the bond of ₹10 will be split into two parts – ₹2 accrued interest and ₹8 capital gains and taxed as such – when the bond is sold in March.

 

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Should you invest in the latest Sovereign Gold Bond issue?

Personal Finance

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The latest Sovereign Gold Bond Scheme 2021-22 – Series VI will be open for subscription from August 30 to September 3, 2021. The issue price is ₹4,732 per bond (equivalent to one gram of gold). Those applying online and paying digitally get a discount of ₹50 on the issue price.

SGBs can be bought from banks, designated post offices, stockbrokers and the NSE and the BSE.

Why invest

The latest SGB issue price of ₹4,732 is lower by ₹45 to ₹157 per bond than in the preceding five issues in 2021-22. The price is a simple average of the price of gold (999 purity) for the last three business days preceding the subscription period.

Gold prices have fallen around 13 per cent rice (in rupee terms) since the August 2020 high.

Those with a long-term investment horizon can consider buying SGBs in this issue to add to their long-term gold allocation. As of now, no further SGB issues have been announced for this year.

Gold does well when other asset classes such as equity fare poorly and can form part of your portfolio (around 10 per cent) as a hedge against underperformance in other assets.

Given that returns from gold can be lumpy – long periods of poor return followed by short periods of high return – having a longer holding period helps. Over the last 30 years, gold has offered an average 5-year return (CAGR) of 9.4 per cent with the possibility of these returns being negative 13 per cent of the time.

Over the same period, the average 7-year gold return (CAGR) has been 9.7 per cent with the possibility of negative returns being only 1 per cent.

However, investors are advised to keep some powder dry for possible future tranches, which may come at lower prices.

Fears of the US Fed unwinding its ultra-loose monetary policy to rein in inflation have been weighing on gold.

The brass tacks

You can buy a minimum of 1 gram and up to a maximum of 4 kilograms during a financial year.

The limit includes bonds bought in the primary issues as well as those from the secondary market.

The investment tenure of these bonds is eight years. However, early redemption with the RBI is allowed from the fifth year. Both interest and redemption proceeds will be credited to the bank account provided by you at the time of buying the bond.

For this, you can approach the concerned bank or whoever you bought them from, 30 days before the coupon payment date (half-yearly). Request for premature redemption will be accepted only if you approach the concerned bank/post office at least 1 day before the coupon payment date. While you can also sell the SGBs in the secondary market any time before maturity, the lack of adequate trading volumes can be an impediment.

If interested in a more liquid option, consider gold ETFs that can be bought/sold anytime. However, gold ETFs involve an expense ratio while there is no purchase cost for SGBs. ETFs are also subject to capital gains tax, while capital gains on SGBs are tax exempt in certain cases.

Returns and taxation

Apart from the possibility of capital gains (appreciation in gold price between the time of purchase and redemption), SGBs offer investors interest of 2.5 per cent per annum (paid semi-annually) on their initial investment. The interest income is taxed at your relevant slab rate.

If you hold the bonds until maturity (eight years), then the capital gain, if any, is exempt from tax. Capital gains on SGBs sold prematurely in the secondary market are taxed at an individual’s income tax slab rate, if held for 36 months or less, and at 20 per cent with indexation benefit if held for more than 36 months.

This is a free article from the BusinessLine premium Portfolio segment. For more such content, please subscribe to The Hindu BusinessLine online.)

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