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Updated: Sep 14, 2020

Government Bond

Government bonds are essentially a contract between the issuer and the investor, wherein the issuer guarantees interest earnings on the face value of bonds held by investors along with repayment of the principal value on a stipulated date.

Initially, most G-Secs were issued for the purpose of large investors, such as companies and commercial banks. However, eventually, Government of India made government securities available to smaller investors such as individual investors, co-operative banks, etc.

There are various types of govt bonds that are issued by the government of India. The first type is fixed rate, which have a fixed rate of interest which remains constant throughout the tenure of investment irrespective of any fluctuations in the market.

The floating rate bonds are subject to change in the rate of returns in intervals which are declared beforehand.

The Sovereign gold bonds are the bonds wherein entities can invest in gold for an extended period without the burden of investing in physical gold. The prices of these bonds are linked with gold prices. Individuals and Hindu undivided families can only hold up to 4kg of sovereign gold bonds in a financial year. Trusts and other relevant entities can hold up to 20 kg of SGBs during a similar time frame. Interest at 2.50 % is disbursed periodically on such SGBs and has a fixed maturity period of 8 years unless stated otherwise. Also, no tax is levied on interest earnings through such SGBs.Investors seeking liquidity have to wait for the first five years to redeem it.

Inflation-Indexed Bond is a unique financial instrument, wherein the principal, as well as the interest earned on such bond, is accorded with inflation. Mainly issued for retail investors, these bonds are indexed as per the Consumer Price Index (CPI) or Wholesale Price Index (WPI). 7.75% GOI savings bond was a replacement that was done in 2018 of 8% savings bond. The interest of such bonds is set at 7.75%.

Zero-Coupon Bonds do not earn any interest. Earnings from Zero-Coupon Bonds arise from the difference in issuance price (at a discount) and redemption value (at par). This type of bonds are not issued through auction but rather created from existing securities.

There are several advantages and disadvantages of investing in a bond. In bonds, the investor receives income through the interest payments and hold the bonds to maturity and get all your principal back. Bonds pay out lower returns than stocks.

Government bonds have premium status with respect to the stability of funds and promise of assured returns, due to which it is the most secure bond.


India 10 YR Bond - Technical Analysis
India 10 YR Bond - Technical Analysis


The Elliot wave structure seems intact.

Currently, we are in WAVE A which a corrective wave after an impulsive wave. A cup pattern is also seen. With RBI not cutting rates due to inflationary pressure, we assume the yields to go up from here and the bond rally to fully end now.

Sixth tranche of Sovereign Gold Bond Scheme

The issue price for the sixth tranche of the Sovereign Gold Bond Scheme is fixed at Rs 5,117 per gram. Government of India in consultation with the Reserve Bank of India has decided to allow a discount of Rs 50 per gram from the issue price to those investors who apply online and the payment is made through digital mode. For such investors, the issue price of Gold Bond will be Rs 5,067 per gram of gold.

The issue price of SGBs is calculated based on a simple average of spot rates provided by Mumbai-based industry body India Bullion and Jewelers Association (IBJA). Any resident under Foreign Exchange Management Act (FEMA) can invest in SGBs. An individual, HUF, trusts whether a public or private and universities can invest in SGBs. Even investment on behalf of a minor can be made by his guardian. An NRI cannot invest in these bonds but is allowed to hold these bonds received as a nominee of a resident investor. The bonds can be bought from banks, Stock Holding Corporation, post offices and recognized stock exchanges.

The Central Board of the Reserve Bank of India (RBI) approved the transfer of Rs 57,128 crore as surplus — or dividend — to the central government for accounting year 2019-20, sharply lower by 67.5 per cent from Rs 1.76 lakh last year. As per Section 47 of the RBI Act, profits of the RBI are to be transferred to the government, after making various contingency provisions, public policy mandate of the RBI, including financial stability considerations.

The government can use this money in economic reconstruction.

The India 10Y Government Bond has a 6.097% yield.

10 Years vs 2 Years bond spread is 161.2 bp. Normal Convexity in Long-Term vs Short-Term Maturities.

Central Bank Rate is 4.00% (last modification in May 2020).

The India credit rating is BBB-, according to Standard & Poor's agency.

Current 5-Years Credit Default Swap quotation is 89.28 and implied probability of default is 1.49%.

India Government Bonds
The above chart shows the investment results according to the maturity period of the government bond.

“The RBI could protect the 6% level. The level is a psychological mark that the RBI may want to see that yields don’t rise over and above."

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