Bond markets hail G-sec auction
What are Government Securities (G-Sec)?
A Government Security, commonly known as G-Sec is a debt instrument. These are issued either by Central or State Government and are tradeable instruments. The Central Government issues both, treasury charges otherwise called T-bills and bonds or dated protections while the State issues just bonds or dated protections, which are known as the State Development Loans (SDLs). These are backed up by the Government and hence are also known as risk-free investments.
T-bills are of three types. Categorized on the basis of maturity period they are 91 days, 182 days, and 364 days. They do not carry any interest rate. They are issued at a discount to their true (PAR) value and redeemed at true (PAR) value.
Bonds differ from T-bills in two ways. They are long term and have no fixed tenure. They vary depending upon their issue. They pay interest semi annually.
Every bond issued is given a unique name or symbol. The symbol contains all the information defining the instrument. For example, let us consider “662GS2025A”, is a central government bond. If this is decoded, we get to know the bond has an annualized interest of 6.62%, which will be paid semi annually as 3.31% GS stands for type of security that is Government Securities (GS). 2025 indicates the year in which this bond will attain maturity. Finally upon maturity, the principle amount will be received. ‘A’ means it is a fresh issue. This is how the nomenclature of the bond is read.
Impact of additional borrowings on G-sec:
The announcement of government borrowings Rs 34,000 crore instead of the predetermined amount of Rs 30,000 crore, witnesses a positive upswing in the minds of investors. The very 1st auction, dated May 15, 2020 after the news of additional Governmental borrowing of Rs 4,000 crore was out, has seen a great response from the bond market. This announcement from the Reserve Bank of India (RBI) is resulting in spreading positivity in the bond market.
The auction response:
The auction that was held on May 15, auctioned three government bonds. These three bonds will mature in the year 2024, 2033 and 2050 respectively. Collectively, these three bonds intend to raise aggregate money amounting to Rs 30,000 crore. After analyzing the auction response, bonds having maturity in 2033 has been responded with bids around Rs 33,000 crore whereas the notified amount being Rs 11,000 crore. Similarly, bonds having maturity in 2050 has been responded with bids around Rs 21,000 crore whereas the notified amount being Rs 7,000 crore. This implies that above papers have been applied for three times the notified amounts. This is a bullish scenario which is getting reflected by the number of bids in the auction of the Government bonds. The cut-off returns also aligned with the expectations of the market. On the same day, returns on the new benchmark bonds secured 5.78%.
What can be the reason behind this optimistic shift?
Maybe, the reason behind this optimistic shift in the market is because of certain expectations from the RBI. Market is expecting RBI to announce certain measures with respect to the additional Governmental borrowing of Rs 4,000 crore which may benefit all. Another reason could be that the market believes that even though the Government has announced Rs 20 lakh crore as the fiscal package, the total cash outflow will not amount to entire amount specified, rather it will be much lower. Maybe the outflow stays within the limits of additional borrowings that has been announced. The first week of February brought an announcement that estimated borrowings for FY21 has been raised to Rs 12 lakh crore. This has led to an additional borrowing by Rs 4.2 lakh crore which is to be borrowed this year.
Market expects RBI to go for open market operation (OMO) purchases. OMO purchases of at least Rs 3 lakh crore while keeping in mind the principle of conservatism. If these prove to be strong indicators of the reasons behind market being optimistic presently, then in case the above mentioned reasons fails or faces unexpected delay, the market may swing in total opposite direction altogether. This implies it is the hope of the market that is gripping the market and making it act positive. Data from May 15, 2020 reveals that RBI has been buying securities and major portion of it is expected to be the Treasury bills. Further, these have been brought through OMO purchases amounting to Rs 1.2 lakh crore starting from April 2020.