Description
This is a presentation explaining about Government Securities Market; Ownership of G.Secs; G Sec Market Role; G Sec Market and RBI; Terminology and types of Securities; Security Instruments; Mechanics of FRB; Types of Auction
Government Securities Market
• Market size (outstanding stock – approx – 0309) – Central Government Securities – Rs. 15 L crore – State Government Securities – Rs. 4 L crore – Special securities such as Oil, Fert – Rs. 3 L crore – Floating rate bonds – Rs. 45000 crore – Market Stabilization Securities – Rs. 80000 crore • Issuer Government (Central or State) • Manager – RBI (Proposed PDO, Finmin) • Underwriters – Primary Dealers • Issue method – Auction based sale – Private placement with RBI or Others (Oil cos) • Secondary market – CCIL, NSE, BSE and also OTC
Profile - Central Government Dated Securities
2005-06 Gross (000 cr) Net (000 cr) Wt Av Maturity (Yrs) Wt Av Yield (%) 131 95 16.9 7.34 2006-07 146 107 14.72 7.89 2007-08 156 111 14.9 8.12 2008-09 261 217 13.81 7.69
Source: RBI Annual Report 2008-09, Table 58
Maturity Profile of Central Government Securities (%) Year Years-? 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 E 2008-09 E Outstanding Stock Under 5 41 42 37 27 31 26 24 24 24 21 20 20 05-10 41 42 39 47 36 35 32 30 30 31 30 30 Over 10 18 16 24 26 33 39 44 46 46 49 50 50 Issued During the Year Under 5 18 18 – 6 2 – 5 4 0 7 0 6 05-10 82 68 35 41 24 36 18 19 26 47 57 55 Over 10 – 14 65 53 74 64 77 77 74 46 43 39
Ownership of G.Secs (Central+States) (% share in total outstanding) As at end March Owner RBI Banks LIC Others Total 1996 7% 65% 17% 11% 100% 2001 8% 61% 18% 13% 100% 2008 (E) 8% 46% 22% 24% 100%
G Sec Market - Role
• Provide benchmark risk free interest rate • Facilitate government borrowing program • Platform for central bank for managing liquidity and interest rate expectations thru OMO • To signal changes in interest rate scenario • Balancing act – Cost of government borrowing – interest rates – Timing of government borrowing – overall liquidity – Term distribution of outstanding stock • Maturity ranging between 1 year and 30 years – Needs of different types of participants • Banks, Insurance Companies, Mutual Funds, Corporates, other FIs
G Sec Market and RBI
• Decisions before the central bank – Crucial for OMO operations – Method - Outright Sale/Purchase, Repos – New issues, Re-issues (from its own stock) – Timing and size of intervention - liquidity – Cost / market need / Government requirement – Instrument – type, coupon, maturity – Type of auction • Conduct operations such that 1. Offer signals to the market Use of different kinds of securities, term, scale 2. Help shape market expectations about liquidity and interest rates 3. Smoothen liquidity mismatches
Terminology and types of Securities
• Discount bond – Issued at discount to maturity value – One year Rs.100 bond issued at Rs.95.5( 4.71%) • Coupon bond – Rate of interest (coupon, maturity, par value) define this bond – E.g.– 6% 2011 bond, maturity value of Rs.100 – Coupon generally paid twice a year • Yield to maturity (YTM) – IRR delivered by a bond if held to maturity • Different concepts of returns – Current yield/return – Holding period yield/return – YTM
Security choices - Instruments
• Treasury Bill – Issued at discount to redemption value – Less than one year maturity – Typical maturities 14 D, 91D, 182D, 364D • Coupon Bond – generally a fixed coupon security – Issue price is determined by market – Underlying yields indicate market perspective on interest rates. Example - 8.24% G Sec 2018 – Issue date May 26, 08 price = 101.54, YTM = 8.07 – Issue date July 7, 08 price = 94.28, YTM = 9.13 • Floating Rate Bond – Coupon floats with benchmark – 364 D T bill yield – Formula: “x” bp spread over the benchmark yield – Example Aug 9, 2004 issue, FRB 2011, spread 50 bp, benchmark, 364 day T bill, Base rate 4.62% – The spread is decided in an auction
Mechanics of FRB
• Base rate and rate of interest payable on FRB 2015 II, Calculation for the Year ending August 9, 2005 • Date of issue – August 10, 04 • Previous three 364 D T bill auction results • Av. of three yields rounded off to two decimal = 4.62 • If the spread is 35 bp • Interest rate applicable for Feb9, 05 and Aug 9, 05 • 4.62 plus 0.35 = 4.97%
7.7.04 95.6 4.6025
21.7.04
4.8.04
95.58
95.58
4.6244
4.6244
Security choices - Instruments
• Zero Coupon Bond – Bond does not pay annual coupon – The issue price is discounted with respect to issue price and term. Resulting IRR is yield – Example: ZCB 2000 issued on Oct 7, 1996 at Rs.59.73 (maturity value Rs.100 on Oct 7, 2000) • Inflation indexed Bond – These bonds assure inflation protection – Protection for principal or coupon or both – Coupons are generally very low – Example 2% inflation indexed bonds of Rs.100 – Coupon payment (six monthly) = 1*WPI (t) /WPI(b) – Redemption = 100 *(WPI (t) /WPI(b) )
Types of Auction
• Type of auction – Price based – Bidders bid for a price with YTM the result of the price • Uniform price – all bidders pay the same price • Multiple price – bidders pay the price they quote with reference to cut-off – Yield based – Bidders bid for a yield with price fixed at Rs.100 • Uniform yield • Multiple yield
Examples – Auction Types 7.59% GS 2016 (Rs.3000 Cr)
Bids Amt (Rs. Cr) Prices (Rs) Multiple Uniform
1 2 3 4
5 6 7 8 Total
230 450 1000 150
2000 2000 500 400 6730
95.57 95.55 95.54 95.51 ©
95.49 95.48 95.46 95.43
230 450 1000 150
0 0 0 0 1830
1830
Issue guidelines
• Scale of operation – Predetermined or variable • Timing – Predetermined or Ad hoc • Bidding conditions – Who will participate and how – Underwriting commission (based on auction) – Bid acceptance and rejection rules – When issued market eligibility – Excess subscription retention – Allotment procedure and rules • Competitive or Non-competitive or both • Non competitive bidders accept the auction result. • Retention of excess subscription • When Issued market – short sales permitted (study guidelines)
doc_678822344.ppt
This is a presentation explaining about Government Securities Market; Ownership of G.Secs; G Sec Market Role; G Sec Market and RBI; Terminology and types of Securities; Security Instruments; Mechanics of FRB; Types of Auction
Government Securities Market
• Market size (outstanding stock – approx – 0309) – Central Government Securities – Rs. 15 L crore – State Government Securities – Rs. 4 L crore – Special securities such as Oil, Fert – Rs. 3 L crore – Floating rate bonds – Rs. 45000 crore – Market Stabilization Securities – Rs. 80000 crore • Issuer Government (Central or State) • Manager – RBI (Proposed PDO, Finmin) • Underwriters – Primary Dealers • Issue method – Auction based sale – Private placement with RBI or Others (Oil cos) • Secondary market – CCIL, NSE, BSE and also OTC
Profile - Central Government Dated Securities
2005-06 Gross (000 cr) Net (000 cr) Wt Av Maturity (Yrs) Wt Av Yield (%) 131 95 16.9 7.34 2006-07 146 107 14.72 7.89 2007-08 156 111 14.9 8.12 2008-09 261 217 13.81 7.69
Source: RBI Annual Report 2008-09, Table 58
Maturity Profile of Central Government Securities (%) Year Years-? 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 E 2008-09 E Outstanding Stock Under 5 41 42 37 27 31 26 24 24 24 21 20 20 05-10 41 42 39 47 36 35 32 30 30 31 30 30 Over 10 18 16 24 26 33 39 44 46 46 49 50 50 Issued During the Year Under 5 18 18 – 6 2 – 5 4 0 7 0 6 05-10 82 68 35 41 24 36 18 19 26 47 57 55 Over 10 – 14 65 53 74 64 77 77 74 46 43 39
Ownership of G.Secs (Central+States) (% share in total outstanding) As at end March Owner RBI Banks LIC Others Total 1996 7% 65% 17% 11% 100% 2001 8% 61% 18% 13% 100% 2008 (E) 8% 46% 22% 24% 100%
G Sec Market - Role
• Provide benchmark risk free interest rate • Facilitate government borrowing program • Platform for central bank for managing liquidity and interest rate expectations thru OMO • To signal changes in interest rate scenario • Balancing act – Cost of government borrowing – interest rates – Timing of government borrowing – overall liquidity – Term distribution of outstanding stock • Maturity ranging between 1 year and 30 years – Needs of different types of participants • Banks, Insurance Companies, Mutual Funds, Corporates, other FIs
G Sec Market and RBI
• Decisions before the central bank – Crucial for OMO operations – Method - Outright Sale/Purchase, Repos – New issues, Re-issues (from its own stock) – Timing and size of intervention - liquidity – Cost / market need / Government requirement – Instrument – type, coupon, maturity – Type of auction • Conduct operations such that 1. Offer signals to the market Use of different kinds of securities, term, scale 2. Help shape market expectations about liquidity and interest rates 3. Smoothen liquidity mismatches
Terminology and types of Securities
• Discount bond – Issued at discount to maturity value – One year Rs.100 bond issued at Rs.95.5( 4.71%) • Coupon bond – Rate of interest (coupon, maturity, par value) define this bond – E.g.– 6% 2011 bond, maturity value of Rs.100 – Coupon generally paid twice a year • Yield to maturity (YTM) – IRR delivered by a bond if held to maturity • Different concepts of returns – Current yield/return – Holding period yield/return – YTM
Security choices - Instruments
• Treasury Bill – Issued at discount to redemption value – Less than one year maturity – Typical maturities 14 D, 91D, 182D, 364D • Coupon Bond – generally a fixed coupon security – Issue price is determined by market – Underlying yields indicate market perspective on interest rates. Example - 8.24% G Sec 2018 – Issue date May 26, 08 price = 101.54, YTM = 8.07 – Issue date July 7, 08 price = 94.28, YTM = 9.13 • Floating Rate Bond – Coupon floats with benchmark – 364 D T bill yield – Formula: “x” bp spread over the benchmark yield – Example Aug 9, 2004 issue, FRB 2011, spread 50 bp, benchmark, 364 day T bill, Base rate 4.62% – The spread is decided in an auction
Mechanics of FRB
• Base rate and rate of interest payable on FRB 2015 II, Calculation for the Year ending August 9, 2005 • Date of issue – August 10, 04 • Previous three 364 D T bill auction results • Av. of three yields rounded off to two decimal = 4.62 • If the spread is 35 bp • Interest rate applicable for Feb9, 05 and Aug 9, 05 • 4.62 plus 0.35 = 4.97%
7.7.04 95.6 4.6025
21.7.04
4.8.04
95.58
95.58
4.6244
4.6244
Security choices - Instruments
• Zero Coupon Bond – Bond does not pay annual coupon – The issue price is discounted with respect to issue price and term. Resulting IRR is yield – Example: ZCB 2000 issued on Oct 7, 1996 at Rs.59.73 (maturity value Rs.100 on Oct 7, 2000) • Inflation indexed Bond – These bonds assure inflation protection – Protection for principal or coupon or both – Coupons are generally very low – Example 2% inflation indexed bonds of Rs.100 – Coupon payment (six monthly) = 1*WPI (t) /WPI(b) – Redemption = 100 *(WPI (t) /WPI(b) )
Types of Auction
• Type of auction – Price based – Bidders bid for a price with YTM the result of the price • Uniform price – all bidders pay the same price • Multiple price – bidders pay the price they quote with reference to cut-off – Yield based – Bidders bid for a yield with price fixed at Rs.100 • Uniform yield • Multiple yield
Examples – Auction Types 7.59% GS 2016 (Rs.3000 Cr)
Bids Amt (Rs. Cr) Prices (Rs) Multiple Uniform
1 2 3 4
5 6 7 8 Total
230 450 1000 150
2000 2000 500 400 6730
95.57 95.55 95.54 95.51 ©
95.49 95.48 95.46 95.43
230 450 1000 150
0 0 0 0 1830
1830
Issue guidelines
• Scale of operation – Predetermined or variable • Timing – Predetermined or Ad hoc • Bidding conditions – Who will participate and how – Underwriting commission (based on auction) – Bid acceptance and rejection rules – When issued market eligibility – Excess subscription retention – Allotment procedure and rules • Competitive or Non-competitive or both • Non competitive bidders accept the auction result. • Retention of excess subscription • When Issued market – short sales permitted (study guidelines)
doc_678822344.ppt