Tag: G-Sec

RBI devolves ₹7,436 crore worth 2030 G-Sec on PDs

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The Reserve Bank of India (RBI) devolved about 53 per cent of the notified amount of ₹14,000 crore on primary dealers (PDs) at the auction of the benchmark Government Security (G-Sec/GS) maturing in 2030.

However, the auction of the other two G-Secs (4.26 per cent GS 2023 and 6.76 per cent GS 2061) sailed through.

Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, observed that RBI set relatively higher cut-off rate for additional competitive underwriting (ACU) commission for PDs for the 2030 G-Sec, indicating that market participants were not too keen on buying the paper.

The ACU commission was 13 paise for 2061 G-Sec and 0.42 paise for 2023 G-Sec.

RBI devolved ₹7,436.458 crore worth of the 2030 G-Sec (coupon rate: 5.85 per cent) on PDs. It accepted bids aggregating ₹6,563.542 crore for this paper.

The central bank set a cut-off price of ₹98.97 (yield: 5.9937 per cent) for this paper against its previous closing price of ₹99.015 (5.9873 per cent). Bond yield and price are inversely related and move in opposite directions.

In the secondary market, the 2030 G-Sec closed at ₹98.90 (6.0035 per cent).

RBI accepted bids aggregating ₹3,550 crore for the 2023 G-Sec (against the notified amount of ₹3,000 crore). It accepted bids aggregating to the notified amount of ₹9,000 crore in the case of the 2061 G-Sec.

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Op Twist: Banks’ offer to sell 6.3 times the ₹10,000-crore notified amount of G-Secs to RBI

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Banks on Thursday offered to sell three Government Securities (G-Sec) aggregating ₹63,012 crore to the Reserve Bank of India (RBI) against the notified amount of ₹10,000 crore at the first special Open Market Operation (OMO) — simultaneous purchase and sale auction of G-Secs — of FY22.

Of the three G-Secs the RBI intended to purchase under OMO Purchase and Sale (Operation Twist), it accepted offers aggregating ₹10,000 crore only for the benchmark 2030 G-Sec (coupon rate: 5.85 per cent).

The central bank jad rejected all the offers it received for the 2026 G-Sec (6.97 per cent) and 2028 G-Sec (7.17 per cent).

RBI set the cut-off price for the purchase of the 2030 G-Sec at ₹99.10 (previous closing price: ₹99.07), with the cut-off yield coming in at 5.9742 per cent (5.9783 per cent).

The central bank received bids aggregating ₹36,471 crore at the sale of two 182 day Treasury Bills under the Operation Twist against the notified amount of ₹10,000 crore. It accepted bids for the notified amount.

Under Operation Twist, RBI simultaneously buys long-term G-Secs and sells Treasury Bills to lower longer-term interest rates.

G-Sec prices moved in a narrow band in the secondary market as auction of four G-Secs aggregating ₹32,000 crore is scheduled on May 7.

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Devolvement pushes G-Sec yields higher

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The first weekly Government Securities (G-Sec) auction of the fiscal year 2022 (FY2022) devolved on primary dealers, triggering a sell-off in the secondary market, with yields of most G-Secs going up.

Of the four G-Secs put up for auction, the RBI devolved the bonds maturing in 2026 on PDs. Of the notified amount of ₹11,000 crore, PDs, who underwrite the auctions, had to absorb ₹10,926.29 crore worth of the paper. In the auction of other three papers — Government of India Floating Rate Bonds maturing in 2033 (notified amount: ₹4,000 crore), new G-Sec maturing in 2035 (₹10,000 crore) and 6.67 per cent G-Sec maturing in 2050 (₹7,000 crore) — the Government exercised the greenshoe option aggregating ₹5,853.23 crore.

Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, said: “The government has done additional borrowing by exercising the greenshoe option. During the auction, most bidders would have sought a higher yield for the new G-Sec 2026. So, the RBI devolved this paper at 5.63 per cent. The market is trying to take the yields up, but they (RBI) are trying to bring the yields down. There is a tug-of-war,” Irani said. He observed that inflation data will be announced on Monday and the expectation is that G-Sec yields will drift higher. The exercise of the greenshoe option at the auction and the devolvement had their impact on the secondary market, with yields rising on most securities.

The yield on the G-Sec maturing in 2035 rose about 3 basis points to close at 6.5894 per cent.

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What is meant by bond yield hardening

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A phone call between two friends leads to a conversation on rising bond yields and what it means to them

Karthik: You know, I have been experiencing frequency illusion.

Akhila: What are you talking about?

Karthik: I learnt what yield means from last week’s Simply Put column in BusinessLine and now I see that word everywhere in all newspaper headlines.

Akhila: That the bond yields are hardening?

Karthik: Yeah. Any idea what yield hardening means?

Akhila: Hardening means rise in value. Yield hardening means bond yields are rising, which indicates that bond prices are falling. In the current context, this is with reference to the 10-year G-sec (or government bond), the yield on which has gone up from 5.9 per cent towards the end of January 2021 to about 6.2 per cent now.

Karthik: Since the yield is calculated by dividing the coupon rate with the current market price, any drop in the bond prices will raise the yields. I understand that. But tell me why are bond prices falling in the market?

Akhila: That is due to the government’s announcement in the budget that it will borrow an additional Rs 80,000 crore in February and March 2021 and a massive Rs 12 lakh crore in FY22.

Karthik: What is the link between bond prices and government borrowing?

Akhila: When the government borrowing increases, the supply of government bonds in the market increase. With concerns of oversupply of government paper in the bond market, there has been pressure on bond prices.

Karthik: Ok..

Akhila: As the yields on G-secs harden, the cost of borrowing not just for the government but also for companies inches up. Companies’ borrowing costs too are linked to G-sec yields.

Karthik: Oh! Can the RBI do something about it?

Akhila: RBI has been buying government bonds via open market operations (OMO) to keep the bond yield under check to control the borrowing cost of the centre. One section of the bond market watchers also argue that the central bank should stay away from any intervention as the rise in bond yields now is being witnessed globally and not exceptional to India.

Karthik: Oh! I get it now. I only hope that my existing fixed-income investments will not be impacted by these rising yields at this point.

Akhila: If you have any investments in the debt funds, they will.

Karthik: Oops. How?

Akhila: Due to the fall in bond prices, the debt funds you invested in may suffer mark-to-market losses on their g-sec or corporate bond holdings.

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G-Sec yields continue to rise

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The Government Securities (G-Sec) market continued to be spooked by a host of factors, including oversupply of G-Secs, rising US Treasury yields and oil prices.

Yield on the widely-traded 10-year benchmark G-Sec (carrying a coupon rate of 5.85 per cent) rose about 5 basis points to about 6.2290 per cent, with its price declining about 33 paise to ₹97.25 over the previous close.

Yield on the earlier 10-year benchmark G-Sec (carrying a coupon rate of 5.77 per cent) jumped about 8 basis points to about 6.3162 per cent, with its price dropping about 54 paise to ₹96.16 over the previous close.

The discomfort of the market players with the yields manifested in the form of them seeking higher yields at the auction of two G-Secs.

So, the Reserve Bank of India devolved about 66 per cent of the notified amount of ₹4,000 crore in the case of the three-year G-Sec on primary dealers (PDs). It also devolved about 19 per cent of the notified amount of ₹11,000 crore in the case of the 15-year G-Sec.

In the case of the auction of two other G-Secs, the Government exercised greenshoe option on the 13-year floating rate bond, mopping up ₹5,450 crore against the notified amount of ₹4,000 crore, and accepted partial bids aggregating ₹2,503.522 crore against the notified amount of ₹5,000 crore for the 30-year G-Sec.

Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, said: “We will be struggling with inflation as we go ahead because of increase in commodity prices. Additional liquidity infusion is leading to more inflation.

“…In the US also, yields are rising continuously. Across the world, central banks are saying “don’t worry, we will infuse liquidity, this and that”. But markets are not ready to believe. Markets are in correction mode only.”

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Rising G-Sec yields: SBI report warns of MTM losses for banks

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Any further upward movement in Government Security (G-Sec) yields, even by 10 basis points (bps) from the current levels, could usher in mark-to-market (MTM) losses for banks, cautioned State Bank of India’s economic research report ‘Ecowrap’.

SBI’s economic research team believes one of the reasons for the recent surge in yields might be short-selling by market players.

The report said the Reserve Bank of India will have to resort to unconventional tools, including speaking to market players/off-market interventions, open-market operation (OMO) in illiquid securities and penalising short-sellers, to control the surge in bond market yields.

“The average increase in G-Sec yields across three, five and 10 years is around 31 bps since the Budget.

“AAA Corporate bond and SDL (State development loan) spreads have jumped by 25-41 bps during this period,” said Soumya Kanti Ghosh, Group Chief Economic Advisor, SBI.

While this significant increase in bond spreads is a manifestation of the nervousness of market players, Ghosh believes the central bank will have to resort to unconventional tools to control the surge in bond market yields.

Since January-end 2020, the yield on the most traded 10-year G-Sec (the 5.77 per cent GS 2030) has gone up by about 28 bps, with its price declining by about ₹1.90. MTM losses require banks to make provision towards investment depreciation.

Ghosh opined this is important as any further upward movement in G-Sec yields, even by 10 bps from the current levels, could usher in MTM losses for banks that could be a minor blip in an otherwise exceptional year in FY21 for bond markets, with the RBI assiduously supporting debt management of the government at lowest possible cost in 16 years.

In fact, the RBI strategy of devolving on the primary dealers (PDs) may have its limitations as standalone PDs account for 15-16 per cent of secondary market share and this may not be enough to move the market, Ghosh said. This share has remained broadly consistent over long periods despite excessive market volatility.

Short-selling

While going short or long are typical market activities that aid in price discovery, in times, it can result in price distortions, too, as it might be happening now, the report said.

Ecowrap noted that the banks and the primary dealers resort to short-selling when their view is bearish — that is, the prices of the bond will fall and the yield will rise.

“They make money if the bond prices drop and yields rise, and over a point of time, this could become a self-fulfilling prophecy as such short-sellers keep on rolling over their borrowed security from the repo market till the time they believe that yields will continue to rise,” it said.

Ghosh felt that the only way to break such self-fulfilling expectations is for the RBI to conduct large-scale OMOs to provide necessary steam to the bond market to rally and with increase in price, many short sold position will trigger stop losses and market players will scramble to cover open positions. This will hasten a rapid fall in yields over a short period of time.

RBI steps

The report suggested that the RBI could announce steps including announcing a weekly outright OMO calendar of ₹10,000 crore till March-end, reducing the time period for covering short sale from 90 days to 30 days, and prescribing a margin requirement for borrowing securities in the repo market while covering the short-sale position to cool the yields.

It also recommended allowing more players such as mutual funds and insurance companies in the repo market and penalising short-sellers.

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How good is G-Sec as an investment option

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There has been much buzz around investing in Government securities (G-secs) ever since the RBI Governor proposed to allow retail investors to invest in them through the central bank . As of now, you can invest in G-secs via broking firms such as ICICI Securities, HDFC Securities and Zerodha and NSE’s goBID platform.

While direct investing may make it easier , this alone may not be enough to nudge retail investors to jump in.

Not completely risk-free

No risk of default by the Government makes G-secs immune to credit risk. But they are exposed to interest-rate risk, just like other tradeable bonds. When interest rates rise, or expected to rise (fall), G-sec prices can fall (rise) leading to a capital loss (gain).

You must be prepared to see the value of your investment in G-secs going down if interest rates start to pick up. This will, however, be only a mark-to-market loss (and will not be a realised loss) unless you sell the G-secs. So, if you hold them until maturity, you can avoid the capital loss, if any.

Understanding yield

The RBI conducts auctions of G-secs (Government-dated securities with original maturity of one year or more) where institutional investors can place competitive bids for them, and retail investors can apply for allotment. Retail investors must invest a minimum of ₹10,000 and are allotted G-secs at the weighted average price arrived at, in the competitive bidding process. G-secs pay half-yearly interest (coupon), calculated on face value.

Let’s take RBI’s auction conducted on February 18as an example. The ‘5.15% Government Stock 2025’ refers to a batch of G-secs paying 5.15 per cent coupon rate per annum (paid half-yearly) and maturing in 2025. The weighted average price for these G-secs arrived at the auction was ₹ 98.18. That is, the bond price is ₹981.8, and on maturity, the face value of ₹1,000 will be paid.

If an investor holds the bond till maturity, then his return will be indicated by the YTM (yield to maturity) which accounts for not only the coupon payments but also the purchase price of the bond. In our example, the YTM is around 5.59 per cent. Since the bond was issued at a discount to face value (₹981.8 versus ₹1,000), the YTM is higher than the coupon rate.

Another recently auctioned G-sec, ‘5.85% Government Stock 2030’ is offering a YTM of only around 6.06 per cent. Also, as with other bonds, once the G-secs get listed, then as their prices change, so will their YTMs (from what they were in the auction).

Not always attractive

Today, based on data from the RBI auctions (primary market) and the already listed Government bonds (trading in the secondary market), we can see that G-secs yields (YTMs) are quite low. There are other fixed-income options that can offer you a better deal.

For example, based on aggregated data from the secondary market, three-year G-secs are offering a yield of 4.88 per cent. Compared to this, public sector banks are offering 4.9 to 5.5 per cent per annum on their three-year fixed deposits. Private sector bank FDs too will fetch you better rates. Three-year post-office deposits, which carry no risk of default, are offering 5.5 per cent per annum.

Similarly, five-year G-secs are offering a yield of 5.69 per cent. The equally safe five-year post-office deposits and Senior Citizen Savings Scheme (the latter usually for those 60 and above) are offering a higher 6.7 per cent and 7.4 per cent, respectively.

Unlike G-secs, bank fixed deposits and small savings schemes (post-office time deposits and senior citizen savings scheme, to name a few) come with a few years’ minimum lock-in period. However, given the lack of liquidity in G-secs in the secondary market, the absence of a minimum lock-in period can hardly be considered an advantage. Also, interest (coupons) income from G-secs is taxed at an individual’s income tax slab rate as is the case with the interest income (paid out or accumulated) from the other options mentioned here.

Don’t lock into low yields

If one were to look at longer periods, here too, a yield of 6.67 per cent pre-tax (and lower once you apply the relevant tax slab rate) on 15-year G-secs is less attractive than the tax-free 7.1 per cent offered by Public Provident Fund (PPF). But you can invest only up to 1.5 lakh a year in PPF.

It is likewise for other G-secs too. For instance, the 6.52 per cent yield (January-end 2021) on 30-year G-secs is well below its 10-year average of 7.82 per cent. By investing in such long-term G-secs today and staying put until maturity, investors will lose out on a better long-term return, once rates start moving up. Hence, timing is important when you invest for holding until maturity.

“The government and the RBI need to create liquidity for retail investors to enable premature exit,” says Deepak Jasani, Head of Retail Research, HDFC Securities. According to him, this can be done by promoting market making in them, at least initially. Also, a window for premature encashment at the prevailing yields, subject to a maximum of the face value, can be offered.

(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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PDs suffer in yield war between RBI and bidders

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Government Securities (G-Sec) auctions are caught in a tug-of-war between bidders demanding higher yields and the Reserve Bank of India’s reluctance to concede that, leading to devolvement on primary dealers (PDs).

Of the four G-Sec auctions conducted since the Budget, only one (on February 11) was fully subscribed without PD support.

In the G-Sec auctions conducted since the Budget announcement, the RBI devolved G-Secs aggregating about ₹37,000 crore on PDs.

 

Borrowing target

Finance Minister Nirmala Sitharaman had announced in her Budget speech that the government would need to borrow another ₹80,000 crore in February-March and the gross borrowing from the market for FY22 would be around ₹12-lakh crore.

The market wants higher yields, but the central bank, which is the banker and debt manager to the government, wants to the keep the yields from rising as they have implications for the cost of government’s borrowing.

Rising G-Sec yields will have a ripple effect as the cost of borrowing of States and India Inc too will rise in sync.

Since January-end, the yield on the widely traded 10-year G-Sec (maturing in 2030 and carrying 5.77 per cent coupon rate) has increased by about 23 basis points to 6.1792 per cent, with its price declining by ₹1.59 to ₹97.1.

Referring to the devolvement of two G-Secs aggregating about ₹21,594 crore on PDs at Thursday’s auction, Marzban Irani, Chief Investment Officer – Fixed Income, LIC Mutual Fund, said: “The bids were on the higher side and the RBI wanted to give a signal that it was not comfortable at those yields. Hence, the auction got devolved.”

Market wants correction

Irani observed that the market wants the yields to correct. The yield curve across maturities such as 6 years, 7 years, 8 years, and 15 years has corrected but not the 10-year yield. Hence, the market wants the 10-year G-Sec yield to inch up, he added.

“The borrowing programme this year as well as next is on the higher side. Unless the yield curve gets corrected, there won’t be aggressive bidding at the auctions. The RBI will have to support via open market operations (OMOs) at regular intervals,” he said.

Hardening yields

Edelweiss Mutual Fund, in its latest bond market update, noted that G-Sec yields have hardened in anticipation of a mismatch in the demand-supply dynamics.

“The bond market was hoping that the RBI would guide the market with some sort of calendar for OMO bond purchase programme for the next year. However, the RBI has refrained from doing that.

“Perhaps they don’t want to pre-commit themselves at this point. However, the RBI said that the government’s borrowing programme will be concluded without any disruption. This is quite reassuring. However, the bond market is not convinced on this yet,” the report said.

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70 bps decline in price of 10-year G-Sec

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Price of the benchmark 10-year Government Security (G-Sec) declined by about 70 basis points, with its yield rising about 10 basis points, as two of the four G-Secs devolved on primary dealers (PDs) at the auction held on Thursday.

The central bank devolved about 97 per cent of the notified amount of ₹11,000 crore at the auction of the 2025 G-Sec (coupon rate: 5.15 per cent).

It also devolved about 99 per cent of the notified amount of ₹11,000 crore at the auction of the 2030 G-Sec (coupon rate: 5.85 per cent).

PDs’ bid to underwrite various amounts in G-Sec auctions at different commission rates. Market players say the RBI agreed to pay a relatively higher commission for PDs at Thursday’s auction, and the devolvement of the two aforementioned G-Secs on them should be seen in this context.

In the case of auction of the 2022 G-Sec (3.96 per cent), the RBI accepted a greenshoe amount of ₹145.052 crore over and above the notified amount of ₹2,000 crore.

In the case of auction of the 2061 G-Sec (new issuance), the RBI accepted partial amount of ₹3,501.335 crore against the notified amount of ₹7,000 crore.

“Devolvement on PDs and fatigue in the market (about over supply of G-Secs) are the main reasons why yields went up today,” said Marzban Irani, CIO-Fixed Income, LIC Mutual Fund.

Irani observed that yields may nudge up next week as PDs will start selling the G-Secs that devolved on them. The Bond market is closed on Friday on account of Chhatrapati Shivaji Maharaj Jayanti.

In the secondary market, price of the 10-year benchmark (2030/ 5.85 per cent coupon) G-Sec fell 73 paise to ₹97.94 over the previous close, with its yield going up about 10 basis points to 6.1318 per cent.

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RBI announces OMO of ₹10,000 crore on Feb 25

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The Reserve Bank of India (RBI) on Monday said it will conduct simultaneous purchase and sale of Government securities (G-Secs) under Open Market Operations (OMO) for an aggregatei amount of ₹10,000 crore each on February 25, 2021.

Under this exercise , also known as ‘Operation Twist’ (OT), RBI purchases G-Secs/ GS of longer maturities and sells an equal amount of G-Secs of shorter maturities to manage the yield curve. This move is aimed at softening the yield curve at the longer end.

RBI will purchase three G-Secs — 5.22 per cent GS 2025, 6.45 per cent GS 2029 and 6.57 per cent GS 2033 — aggregating ₹10,000 crore under OT. Simultaneously, it will sell two G-Secs — 8.79 per cent GS 2021 and 8.20 per cent GS 2022 — aggregating ₹10,000 crore.

The OT move comes in the backdrop of G-Sec prices hardening due to over supply of paper on account of higher government borrowing.

G-Sec prices had declined last Friday, erasing the previous day’s gains, as the Government devolved on Primary Dealers (PDs) about 61 per cent of the ₹11,000 crore it wanted to raise via auction of the 2035 security.

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