BOND PORTFOLIO

MANAGEMENT
STRATEGIES
PASSIVE MANAGEMENT STRATEGIES–ACTIVE
MANAGEMENT
STRATEGIES – GLOBAL FIXED INCOME
INVESTMENT STRATEGY
HOW ARE BOND PORTFOLIOS
MANAGED?
• Bond portfolio management strategies can help investors get the most of
their portfolio, by actively managing fixed income investments to ensure
maximum returns.
• Bond portfolio management strategies are based on a particular objective
– usually maximizing return on investment by minimizing risk and
managing interest rates.
• Bond portfolio management strategies that involve forecasting interest
rates and altering a bond portfolio to take advantage of those forecasts
are called “interest rate anticipation” strategies.
• the differences in interest rates for different terms of bonds, called the
“term structure” of interest rates.
• Bond portfolio management strategies based on sector rotation
BOND PORTFOLIO MANAGEMENT STRATEGIES

1. Passive management stratégies

2. Active management stratégies
PASSIVE BOND MANAGEMENT STRATEGY
• The passive buy-and-hold investor is typically looking to maximize the
income-generating properties of bonds.
• The premise of this strategy is that bonds are assumed to be safe, predictable
sources of income.
• Buy and hold involves purchasing individual bonds and holding them to
maturity.
• In a passive strategy, there are no assumptions made as to the direction of
future interest rates and any changes in the current value of the bond due to
shifts in the yield are not important.
• One of the main reasons for their stability is the fact that passive strategies
work best with very high-quality, non-callable bonds like government or
investment-grade corporate or municipal bonds.
• These types of bonds are well suited for a buy-and-hold strategy as they
minimize the risk associated with changes in the income stream due to
embedded options
CONT….
• There are two specific passive portfolio management strategies: buy-and-
hold strategy and indexing.
• The buy-and-hold strategy seeks to only select a portfolio based on the
objectives and constraints of the investor with the intent on holding these
bonds to maturity.
• whereas the indexing strategy attempts to replicate the performance of a
given benchmark usually a bond index.
• A buy-and-hold strategy involves buying bonds that match the investor’s
requirements in terms of yield, maturity and duration, whilst also
examining features such as quality, coupon rate, call features and sinking
funds.
• Thus the buy-and-hold strategy is an uncomplicated management plan that
attempts to reduce active trading and therefore the associated
reinvestment risk and costs.
CONT….
• Another variation of the buy-and-hold strategy is the bond ladder.
• A bond ladder is a portfolio of bonds with different maturities.
• The bonds are held until maturity and the proceeds reinvested into a new
bond with a maturity at the far end of the ladder.
• The advantages of bond ladders include consistent returns, low risk and
on-going liquidity as the bonds mature regularly.
• The buy-and-hold strategy portfolio manager mostly seeks risk-free or very
high quality bonds.
• In general bonds with a callable or puttable feature will not form part of
such a portfolio as this could possibly alter the investor’s cash flows.
• The buy-and-hold strategy minimizes transaction cost, and if implemented
wisely, can be highly productive.
INDEXING STRATEGY

• Rather than forming a buy-and-hold portfolio many investors prefer to

hold portfolios that reflect the characteristics of a selected bond index.
• There are two basic techniques for constructing a passive index portfolio:
• Full replication: The most obvious technique is full replication wherein the
portfolio is constructed by buying all the securities in a specified index in
proportion to their weights in the index.
• Sampling: Sampling addresses the problem of having too many bond
issues. With sampling a portfolio manager only buys a representative
sample of bonds included in the specified index.
• The selection of an appropriate market index a very important decision as
this will determine the risk-return result of the portfolio.
CONT…..

• The idea behind indexing is to replicate the performance of a given

bond index.
• Generally, there exist a large number of constituent bonds in a bond
index (+5000 for large funds).
• These are frequently updated in terms of the actual bonds included
(mature bonds drop-out, new issues included) and the proportions in
which they are included => rebalancing.
IMMUNISATION

• We have seen that bond values fluctuate with rate movements.

• Duration is important in assessing the exposure of the bond’s value to
fluctuations.
• The goal of immunisation is to isolate the value of a bond from
interest rate movements.
• Depending on priorities, firms may wish immunise present (e.g. banks)
or future (e.g. pension) bonds values from fluctuations
ACTIVE BOND PORTFOLIO
MANAGEMENT
• What is Active Bond Portfolio Management?
• the portfolio manager takes an active role in the running, organizing, and
management of the portfolio.
• Active management of funds involves portfolio managers who take an
active position when choosing bonds.
• They seek out bonds that are high performing and that they believe are
more likely to surpass a benchmark index performance over time.
• Active bond portfolio management may also involve buying bonds that
hedge against market fluctuations.
• The goal of active management is maximizing total return by correctly
predicting the market or seeking out mispriced securities.
CONT…

Potential sources of return from fixed income port:

• Coupon income
• Capital gain
• Reinvestment income
Factors affecting these sources:
• Changes in level of interest rates
• Changes in shape of yield curve
• Changes in spreads among sectors
• Changes in risk premium for one type of bond
ACTIVE BOND STRATEGIES

1. Interest rate anticipation,

2. Valuation analysis,
3. Credit risk,
4. Yield spread analysis.
Interest rate anticipation
• Interest rate anticipation is one of the most common and probably the
riskiest of the active bond portfolio strategies since it relies on uncertain
forecasts of future interest rates.
• The strategy is designed to preserve capital when interest rates increase
(thus bond prices decrease) and to receive as much capital appreciation as
possible when interest rates decrease (thus bond prices increase).
CONT…
• If an increase in interest rates is anticipated a portfolio manager can do
one or both of the following:
• Shorten the duration of the portfolio: When interest rates are expected to
increase, the portfolio manager will seek to preserve capital by reducing
the duration of the portfolio.
• Popular investment choices will be short-term obligations such as Treasury
Bills. The portfolio manager should look for the best possible return given
the maturity constraints.
• Invest in an attractive cushion bond: A cushion bond is a high-yield long-
term callable bond that carries a coupon rate substantially above the
current market rate and has a market price lower than what it should (due
to the callable features) given the market yield.
The higher the quality of a bond the more sensitive it is to interest rate
changes. Therefore high-grade non-callable or with strong call protection
bonds will be preferable.
VALUATION ANALYSIS

• The basic principle of valuation analysis is based on the manager’s ability

to identify and purchase undervalued bonds and sell overvalued bonds.
• Undervalued bonds are bonds with and intrinsic value higher than that of
the bond’s current market price and overvalued bonds are bonds with an
intrinsic value lower than that of bond’s current market price.
• Intrinsic value of a bond translates into the expected yield-to-maturity
(YTM).
• The expected YTM of a bond can be determined by evaluating all the
characteristics.
• an understanding of the important valuation characteristics and being
able to accurately estimate the characteristics yield cost is essential to
execute the strategy successfully.
CREDIT ANALYSIS

• A credit analysis strategy involves detailed analysis of the bond issuer

to determine expected changes in its default risk and ultimately in the
credit rating of the issuer.
• The portfolio manager can speculate on the change in credit rating
and possibly make a profit.
• If a portfolio manager anticipates a rise in the credit rating of the
issuer, the bond will be bought before the change and sold at a higher
price after the rating increased.
• Historically there has been a strong cyclical pattern to rating changes.
Downgrading's typically increase during economic contractions and
decrease during economic expansions.
YIELD-SPREAD ANALYSIS

• The yield spread is the difference between the yield of two securities
or between a security and a benchmark.
• With yield-spread analysis the portfolio manager monitors yield
relationships between various types of bonds and seek out
abnormalities in spreads.
• If the spread would be thought to be abnormally high the portfolio
manager would adjust the portfolio to take advantage of a return to
normality.
• yield spread has always been seen as related to the economic climate.
• The yield spread is seen to widen during periods of economic
contraction and uncertainty as investors require higher risk premiums
CONT….

Interest rate volatility is said to affect yield spreads in the

following ways:
1. Yield volatility and the behaviour of embedded options: The value of a
callable bond is the value of a non-callable bond minus the value of the
call option.
2. An increase in yield volatility increases the value of the call option,
effectively decreasing the value of the callable bond.
3. Yield volatility and transaction liquidity: Similarly, an increase in yield
volatility will increase the uncertainty facing bond dealers and will cause
an increase in the bid-ask spreads; these spreads reflect the transactional
liquidity for the related bonds.
4. The effect of yield volatility on the business cycle: As interest rate
volatility causes economic uncertainty, interest rate
BENEFITS OF ACTIVE MANAGEMENT

• the portfolio managers can select a variety of investments rather than

investing in the market as a whole.
• In order to generate profits, the investors consider that some market
segments are less efficient than others.
• Portfolio Manager may manage the volatility or risks of market by
investing in less-risky and high-quality companies instead of investing
in market as a whole.
• Investors may take additional risk for achieving higher-than-market
returns.
• Investors may follow a strategy for avoiding certain industries in
comparison to the market as a whole.
GLOBAL FIXED INCOME OPPORTUNITIES
STRATEGY
• No single currency dominates global bond markets.
• Over half the world’s bonds are denominated in currencies other than the
dollar, and the share of non-dollar bonds is growing.
• Global integration, the end of the Cold War, and the widespread adoption
of free markets mean that more and more issuers have access to the
world’s capital markets.
• Moreover, the creation of the euro means issuers have a realistic
alternative to issuing in dollars.
• There are two ways to use foreign bonds. The first is tactically, or
opportunistically.
• The second approach is to use foreign bonds strategically, as a separate
asset class.
• This means constructing a bond portfolio that is benchmarked to one of
the major global indices,
FIXED INCOME INVESTING STRATEGIES –
TYPES
CONT…

• The laddered bond portfolio investing strategy, commonly

referred to as bond ladder investing, focuses on diversifying
the portfolio by purchasing fixed income securities with
different maturity dates in a ladder-like fashion, i.e., low to
high rung-like fashion.
• the bullet bond portfolio investing strategy requires building a
portfolio by purchasing fixed income securities at different
dates but with the same maturity date. It diversifies the
investment portfolio and, at the same time, ensures a future
“bullet” of profitable returns.
• barbell investing, is a fixed income investing strategy that
requires building a portfolio with two extremes, i.e., short-
term and long-term bonds without intermediate bonds.
CONT…

issuer of the global fixed income securities :

• Developed markets (DM),
• Emerging markets (EM), and
• High yield (HY)
• For example, the emerging markets segment has the greatest number of
issuing countries (over 80), whereas the developed markets segment has
the greatest number of individual securities (over 26,000) for investors to
choose from.
HSBC FIXED INCOME STRATEGIES THROUGHOUT AN
ECONOMIC CYCLE
A GLOBAL FIXED-INCOME
INVESTMENT STRATEGY

Factors to consider
• The local economy in each country including the
effects of domestic and international demand
• The impact of total demand and domestic monetary
policy on inflation and interest rates
• The effect of the economy, inflation, and interest
rates on the exchange rates among countries
CONT…

• The Morgan Stanley Global Fixed Income Opportunities Strategy is a

value-oriented fixed income strategy that seeks total return including a
high level of current income by investing across the fixed income asset
spectrum, inclusive of investment-grade and high-yield credit,
convertible bonds, securitized assets.
• To help achieve this objective, the strategy combines a top-down
macroeconomic assessment,
• to determine optimal beta positioning for the portfolio, with rigorous
bottom-up fundamental analysis and active currency management.
CONT…
RISK CONSIDERATIONS

• There is no assurance that a portfolio will achieve its investment objective.

• Portfolios are subject to market risk, which is the possibility that the
market value of securities owned by the portfolio will decline.
• Market values can change daily due to economic and other events (e.g.
natural disasters, health crises, terrorism, conflicts and social unrest) that
affect markets, countries, companies or governments.
• Fixed-income securities are subject to the ability of an issuer to make
timely principal and interest payments (credit risk), changes in interest
rates (interest-rate risk), the creditworthiness of the issuer and general
market liquidity (market risk).
• In the current rising interest-rate environment, bond prices may fall and
may result in periods of volatility and increased portfolio redemptions.
CONT…
• Longer-term securities may be more sensitive to interest rate
changes. In a declining interest-rate environment, the portfolio
may generate less income.
• Mortgage- and asset-backed securities are sensitive to early
prepayment risk and a higher risk of default and may be hard
to value and difficult to sell (liquidity risk).
• High yield securities (“junk bonds”) are lower rated securities
that may have a higher degree of credit and liquidity risk.
• Foreign securities are subject to currency, political, economic
and market risks. The risks of investing in emerging market
countries are greater than risks associated with investments in
foreign developed countries.
CORE-PLUS BOND PORTFOLIO MANAGEMENT

• Core plus is an investment management style that permits managers to

augment a core base of holdings, within a specified-objective portfolio,
with instruments that have greater risk and greater potential return.
• investments beyond the core objective of a fund
• extra returns are gets from fixed-income investments
• Investment advisors in a core plus fund will build its primary assets
specifically around securities that meet a specified objective.
• Such holdings might represent as much as 75% of the portfolio.
• The remaining balance would then consist of higher-risk holdings.
• The strategy also has the flexibility to invest in below investment-grade
bonds and non-U.S. dollar denominated bonds and currencies.
PHILOSOPHY

• Bond prices reflect market forecasts for a variety of factors, such as

economic growth, inflation, monetary policy, credit risk, and prepayment
risk; yet markets tend to be poor forecasters of future events,
• especially when the implied market forecasts are out of line relative to
historic trends.
• successful portfolio management depends on four factors:
1. Global Perspective
2. Valuation
3. Diversified Holdings
4. Deep Fundamental Research
JPMORGAN CORE PLUS BOND FUND
(ONIAX)

• the Fund invests primarily in investment-grade bonds, but it has the

flexibility to tactically invest 35% of the portfolio’s assets in securities
outside this central category that have enhanced return potential.
• The Fund typically invests these enhancement assets in high-yield
fixed income and foreign debt.
• Total assets in the Fund equal $16.7 billion in July 2021.
• The class A share of the Fund requires a minimum investment of
$1,000.
AMERICAN CENTURY CORE PLUS FUND
(ACCNX)

• The Fund invests primarily in high-quality, intermediate corporate

bonds with five-to-ten-year maturity.
• But it also invests up to 35% of the overall portfolio in alternative fixed
income investments outside of the core holdings—such as lower-
grade, "junk bonds"—to maximize the income.
• The Fund’s investor share has a $2,500 initial investment requirement.
MATCHED-FUNDING TECHNIQUES

• The matched-funding management strategy is a “holistic” investment

strategy as the portfolio manager attempts to match future liabilities
to a portfolio of bonds.
• example a pension fund that need to make future pay-outs to
pensioners over their expected lifetimes.
• Dedicated Portfolios
▪ Dedication refers to bond portfolio management
techniques that are used to service a prescribed set of
liabilities
• Pure Cash-Matched Dedicated Portfolios
• Most conservative strategy
• Dedication With Reinvestment
• Cash flows do not have to exactly match the liability stream
DEDICATED PORTFOLIOS

• This technique may be used as an alternative to immunization or in

combination with it.
• The most conservative manner in which to dedicate a portfolio will be
to construct a portfolio of high quality bonds that will be held until
maturity in order to provide a predictable stream of cash flows from
coupon payments and repayment of principal at maturity.
• For example, if a financial company is obliged to pay out Rs1 million in
10 years, it can protect itself by buying and holding a bond that
matures in 10 years and has a redemption value of Rs1 million.
CONT….
CONT….

• The most important advantage of dedication is the avoidance or reduction

of investment risks.
1. Market risk: Market risk is avoided as the bonds are held to maturity
2. Inflation risk: Inflation risk can be mitigated by building in an anticipated
inflation adjustment into the target cash flows
3. Default risk: Default risk is reduced as dedicated portfolios are usually
constructed from high quality bonds
CONT….

• Matched funding techniques where developed in the 1980’s when

interest rates reached new levels of volatility
• CONSTRUCTING AN IMMUNIZED PORTFOLIO
 CENTRAL GOVT.
G - SECS–TENOR AND YIELDS–PRIMARY ISSUANCE PROCESS,
SECURITIES
PARTICIPANTS–
SGL ACCOUNTS – DEALERS – SECONDARY MARKET – NEGOTIATED
DEALING SYSTEM – T BILLS – CUT OFF YIELDS – STATE
GOVT. BONDS – MONEY MARKET INSTRUMENTS -CALL MONEY
MARKETS– PARTICIPANTS
TYPES OF GOVERNMENT SECURITIES IN INDIA?

• Government securities are investment products issued by

the both central and state government of India in the form
of bonds, treasury bills, or notes.
• They are generally issued for the purpose of refunding
maturity securities for advance refunding of securities that
have not yet matured and raising fresh cash resources.
GOVERNMENT SECURITIES OFFERED BY THE
RESERVE BANK OF INDIA.
Treasury Bills: Treasury bills, also called T-bills, are short term government securities
with a maturity period of less than one year issued by the central government of
India.
Treasury bills are short term instruments and issued three different types:
1) 91 days
2) 182 days
3) 364 days
• Several financial instruments pay interest to you on your investment; treasury
bills do not pay interest because they are also called zero-coupon securities.
Cash Management Bills (CMBs)
• Cash management bills are new securities introduced in the Indian financial
market. The government of India and the Reserve Bank of India introduced this
security in the year 2010.
• Cash management bills are similar to treasury bills because they are short term
securities issued when required.
CONT….
Dated Government Securities
• Dated Government securities are a unique type of securities because they either have
fixed or a floating rate of interest also called the coupon rate.
• They are issued at face value at the time of issuance and remains constant till
redemption.
• Unlike treasury and cash management bills, government securities are recognized as
long-term market instruments because they provide a wide range of tenure starting
from 5 years up to 40 years.
• The investors investing in dated government securities are called primary dealers. There
are eight different types of dated government securities issued by the Government of
India given below:
1) Capital Indexed Bonds
2) Special Securities
3) 75% Savings (Taxable) Bonds, 2018
4) Bonds with Call/Put Options
5) Floating Rate Bonds
6) Fixed Rate Bonds
7) Special Securities
8) Inflation Indexed Bonds
CONT…

• The nomenclature of a typical dated fixed coupon G-Sec

Coupon : 7.17% paid on face value
contains the following
Name of Issuer
features - :coupon, name of the
Government of India
issuer, maturity
Date ofyear.
Issue For example,:-January
7.17%8,GS 2028 would
2018
mean: Maturity : January 8, 2028
: Half-yearly (July 08 and January 08)
Coupon Payment Dates
every year
Minimum Amount of issue/
: ₹10,000
sale
CONT…

State Development Loans

• State development loans are dated government securities issued by the
State government to meet their budget requirements.
• The issue is auctioned once every two weeks with the help of the
Negotiated Dealing System.
• SDL support the same repayment method and features a variety of
investment tenures. But when it comes to rates, SDL is a little higher
compared to dated government securities.
• The major difference between dated government securities and state
development loans is that G-Securities are issued by the central
government while SDL is issued by the state government of India.
CONT…

Treasury Inflation-Protected Securities (TIPS)

• Treasury Inflation-Protected Securities (TIPS) are available based on five,
10 or 30 year term periods. These securities deliver interest payments to
all users every six months.
• TIPS are similar to conventional treasury bonds, but it comes with one
major difference. The same principle is issued during the entire term of the
bond in a standard treasury bond.
Zero-Coupon Bonds
• Zero-coupon bonds are generally issued at a discount to face value and
redeemed at par. These bonds were issued on January 19th 1994.
• The securities do not carry any coupon or interest rate as the tenure is
fixed for the security. In the end, the security is redeemed at face value on
its maturity date.
CONT…

Capital Indexed Bonds

• In these securities, the interest comes in a fixed percentage over the
wholesale price index, which offers investors an effective hedge
against inflation.
• The capital indexed bonds were floated on a tap basis on December
29th 1997.
Floating Rate Bonds
• Floating rate bonds does not come with a fixed coupon rate.
• They were first issued in September 1995 as floating rate bonds are
issued by the government.
Floating Rate Note
• A floating rate note (FRN) is a debt instrument whose coupon rate is tied to a
benchmark rate such as LIBOR or the US Treasury Bill rate. Thus, the coupon
rate on a floating rate note is variable. It is typically composed of a variable
benchmark rate + a fixed spread.
• FRN’s are issued by governments, as well as private companies and financial
institutions. The notes are typically traded over-the-counter.
CONT….

Treasury Notes
• Treasury notes (T-Notes) have two, three, five, or 10-year maturities
making them intermediate-term bonds.
• These notes pay a fixed-rate coupon or interest payment semiannually and
will usually have $1,000 face values.
• Two and three-year notes have $5,000 face values.

• Yields on T-Notes change daily. However, as an example, the 10-year yield

closed at 1.35% on Sept. 10, 2021. Over a 52-week range, the yield varied
between 0.07% and 0.08%.
SOVEREIGN GOLD BOND (SGB):

• SGBs are unique instruments, prices of which are linked to commodity

price viz Gold. SGBs are also budgeted in lieu of market borrowing.
• The calendar of issuance is published indicating tranche description,
date of subscription and date of issuance.
• The Bonds shall be denominated in units of one gram of gold and
multiples thereof.
• Minimum investment in the Bonds shall be one gram with a maximum
limit of subscription per fiscal year of 4 kg for individuals, 4 kg for
Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities
notified by the Government from time to time
WHY SHOULD ONE INVEST IN G-SECS?
investing in G-Secs has the following advantages:
1. Besides providing a return in the form of coupons (interest), G-Secs offer the
maximum safety.
2. G-Secs are available in a wide range of maturities from 91 days to as long as 40
years
3. G-Secs can be sold easily in the secondary market to meet cash requirements.
4. G-Secs can also be used as collateral to borrow funds in the repo market.
5. Securities such as State Development Loans (SDLs) and Special Securities (Oil
bonds, UDAY bonds etc) provide attractive yields.

https://m.rbi.org.in/scripts/FAQView.aspx?Id=79#3
BESIDES BANKS, INSURANCE COMPANIES AND OTHER LARGE
INVESTORS, SMALLER INVESTORS LIKE CO-OPERATIVE BANKS,
REGIONAL RURAL BANKS, PROVIDENT FUNDS ARE ALSO
REQUIRED TO STATUTORY HOLD G-SECS AS INDICATED
BELOW:
A. Primary (Urban) Co-operative Banks (UCBs)
• Section 24 (2A) of the Banking Regulation Act 1949, (as applicable to
co-operative societies) provides that every primary (urban)
cooperative bank shall maintain liquid assets, the value of which shall
not be less than such percentage as may be specified by Reserve Bank
in the Official Gazette from time to time and not exceeding 40% of its
demand and time liabilities (DTL) (in addition to the minimum cash
reserve ratio (CRR) requirement).
• Such liquid assets shall be in the form of cash, gold or investment in
approved securities.
• This is referred to as the Statutory Liquidity Ratio (SLR) requirement.
B. RURAL CO-OPERATIVE BANKS
• As per Section 24 of the Banking Regulation Act 1949, the State Co-operative
Banks (SCBs) and the District Central Co-operative Banks (DCCBs) are required
to maintain assets as part of the SLR requirement.
• i.e in cash, gold or investment in approved securities.
• the value of which shall not be less than such per cent, as prescribed by RBI,
of its total net demand and time liabilities.
• DCCBs are allowed to meet their SLR requirement by maintaining cash
balances with their respective State Co-operative Bank.

C. Regional Rural Banks (RRBs)

• Since April 2002, all the RRBs are required to maintain their entire Statutory
Liquidity Ratio (SLR) holdings in Government and other approved securities.
CONT…

D. Provident funds and other entities

• The non- Government provident funds, superannuation funds and gratuity
funds are required by the Central Government, effective from January 24,
2005, to invest 40% of their incremental accretions in Central and State G-
Secs, and/or units of gilt funds regulated by the Securities and Exchange
Board of India (SEBI)
HOW ARE THE G-SECS ISSUED?
• G-Secs are issued through auctions conducted by RBI.
• Auctions are conducted on the electronic platform called the E-Kuber, the Core Banking
Solution (CBS) platform of RBI. Commercial banks, scheduled UCBs, Primary Dealers,
insurance companies and provident funds, who maintain funds account (current account) and
securities accounts (Subsidiary General Ledger (SGL) account) with RBI, are members of this
electronic platform.
• The RBI, in consultation with the Government of India, issues an indicative
half-yearly auction calendar which contains information about the amount
of borrowing, the range of the tenor of securities and the period during
which auctions will be held.
• The Reserve Bank of India conducts auctions usually every Wednesday to
issue T-bills of 91day, 182 day and 364 day tenors. Settlement for the T-
bills auctioned is made on T+1 day
• Cash Management Bills (CMBs) are also issued at a discount and redeemed
at face value on maturity.
WHAT ARE THE DIFFERENT TYPES OF
AUCTIONS USED FOR ISSUE OF SECURITIES?

i. Yield Based Auction:

ii. Price Based Auction:
• i. Yield Based Auction: A yield-based auction is generally conducted
when a new G-Sec is issued.
• Investors bid in yield terms up to two decimal places (e.g., 8.19%,
8.20%, etc.).
• Bids are arranged in ascending order and the cut-off yield is arrived at
the yield corresponding to the notified amount of the auction.
EX…

• Yield based auction of a new security

• Maturity Date: January 11, 2026
• Coupon: It is determined in the auction (8.22% as shown in the illustration below)
• Auction date:
Details ofJanuary 08, 2016 in the increasing order of bid yields
bids received
• Auction Cumulative Price* with
Bid settlement date/Issue
Amount date:
ofJanuary
bid 11, 2016*
Bid Yield amount coupon as
No. Amount: ₹1000 crore(₹ Cr)
• Notified
(₹ Cr) 8.22%
• * January
1 98.19%
and 10 being holidays
300(Saturday and Sunday),
300 settlement is100.19
done on January 11,
2016
2 (T+1 settlement).
8.20% 200 500 100.14
3 8.20% 250 750 100.13
4 8.21% 150 900 100.09
5 8.22% 100 1000 100
6 8.22% 100 1100 100
7 8.23% 150 1250 99.93
8 8.24% 100 1350 99.87
CONT…

• ii. Price Based Auction: A price based auction is conducted when

Government of India re-issues securities which have already been issued
earlier. Bidders quote in terms of price per ₹100 of face value of the
security (e.g., ₹102.00, ₹101.00, ₹100.00, ₹ 99.00, etc., per ₹100/-).
Details of bids received in the decreasing order of
Ex: Price based auction of an existing security 8.22% GS bid 2026
price
• Maturity Date: January 11, 2026 Amount of Cumulative
Bid Price of
• Coupon: 8.22% bid Implicit yield amount
no. bid
(₹ Cr) (₹ Cr)
• Auction date: January 08, 2016
1 100.19 300 8.19% 300
• Auction settlement date: January 11, 2016* 2 100.14 200 8.20% 500
3 100.13 250 8.20% 750
• Notified Amount: ₹1000 crore
4 100.09 150 8.21% 900
5 100 100 8.22% 1000
6 100 100 8.22% 1100
7 99.93 150 8.23% 1250
8 99.87 100 8.24% 1350
SGL ACCOUNTS

• The contract for sale of allotted securities can be entered into by banks only with
entities maintaining SGL Account with Reserve Bank for delivery and settlement on
the next working day
• With a view to facilitating entities having Subsidiary General Ledger (SGL) accounts
with RBI acting as custodians on behalf of their constituents for holding
Government securities in scripless form,
• Reserve Bank has been allowing SGL Accountholders to have a second (SGL)
Account in the books of Public Debt Office called "Constituents’Subsidiary General
Ledger (CSGL) Account".
• All the transactions put through by a bank, either on outright basis or ready
forward basis and whether through the mechanism of Subsidiary General Ledger
(SGL) Account or Bank Receipt (BR), should be reflected on the same day in its
investment account and, accordingly, for SLR purpose wherever applicable.
SGL ACCOUNT: ELIGIBILITY CRITERIA AND
OPERATIONAL GUIDELINES
• the Reserve Bank of India (the Bank) hereby specifies the conditions applicable
henceforth for opening and maintenance of a Subsidiary General Ledger (SGL) account.
A. The entities mentioned below are eligible to open and maintain an SGL account with the
Bank:
1) (a) A licensed bank
(b) A Primary Dealer
(c) A Financial Institution as defined in terms of Section 45-I (c) (ii) of the Reserve Bank of
India Act, 1934 (2 of 1934).
2) Central Government.
3) State Governments.
4) Insurance Companies regulated by the Insurance Regulatory and Development Authority.
5) Mutual Funds regulated by the Securities & Exchange Board of India.
6) Provident and Pension Funds having investment of ` 500 crore or more in Government
securities.
7) Foreign Central Banks with prior approval of the Bank.
8) Pension Fund Managers regulated by the Pension Fund Regulatory and Development
Authority.
CONT…..

B. In addition, the entities mentioned, below can open and maintain an

SGL account with the Bank.

(a) National Securities Depository Limited (NSDL).

(b) Central Depository Services (India) Limited (CDSL).
(c) Stock Holding Corporation of India Limited (SHCIL).
(d) Such other entities as may be approved by the Bank from time to
time.
II. CONDITIONS FOR OPENING &
MAINTENANCE OF THE SGL ACCOUNT:
• An eligible entity shall open and maintain only one SGL account, unless
specifically allowed by the Bank to open an additional SGL account.
• An SGL account holder shall not be eligible to open a constituent account
with any Constituents'
• An SGL account holder shall maintain a settlement account with any
designated settlement bank, as approved by the CCIL from time to time, to
enable the Bank to settle the funds in respect of transactions pertaining to
the SGL account.
• The entity opening an SGL account shall submit an application form,
indemnity bond and such other documents, including approval of the
concerned regulator.
• An SGL account can be opened at its Public Debt Offices, as may be
decided by the Bank from time to time.
WHO ARE PRIMARY DEALERS IN MONEY
MARKET?

• Primary dealers are registered entities with the RBI who have the
license to purchase and sell government securities.
• They are entities who buys government securities directly from the
RBI (the RBI issues government securities on behalf of the
government), aiming to resell them to other buyers.
• The Primary Dealers system in the government securities market was
introduced by the RBI in 1995.
• The RBI instructs PDs to have a minimum turnover ratio, bidding ratio,
underwriting ratio, secondary market participation etc to ensure that
they are active in supporting the trade in government securities.
ELIGIBILITY CONDITIONS FOR PDS

• a. Subsidiary of scheduled commercial bank/s and All India Financial Institutions

• b. Subsidiaries/ joint ventures set up in India by entities incorporated abroad.
• c. Company incorporated under the Companies Act, 1956 and does not fall under
(a) or (b).
Role and Functions of Primary Dealers
• (i) commit participation as Principals in Government of India issues through bidding
in auctions
• (ii) provide underwriting services
• (iii) offer firm buy – sell / bid ask quotes for T-Bills & dated securities
• (v) Development of Secondary Debt Market
Core Activities Non-Core Activities
i. Dealing and underwriting in G-Sec, A)Activities which are expected to
consume capital such as:, i. Investment /
trading in equity and equity derivatives
market

ii. Dealing in Interest Rate Derivatives ii. Investment in units of equity oriented
mutual funds, and
iii. Providing broking services in G-Sec, iii. Underwriting public issues of equity.
Bottom of Form
v. Dealing and underwriting in Corporate /
PSU / FI bonds/ debentures,
vii. Investment in Certificates of Deposit
(CDs)
viii. Investment in Security Receipts issued
by Securitization Companies/
Reconstruction Companies, Asset Backed
Securities (ABS), Mortgage
Backed Securities (MBS),
EXAMPLES OF PRIMARY DEALERS

• Some of the best-known primary dealers in the United

States include J.P. Morgan Chase, Barclays Capital, Wells
Fargo, and Citigroup. TD Securities, Morgan Stanley, Cantor
Fitzgerald, and Goldman Sachs are also primary dealers in
the U.S
STATE GOVT. BONDS
• In India, the Central Government issues both, treasury bills and bonds or
dated securities while the State Governments issue only bonds or dated
securities, which are called the State Development Loans (SDLs).
• https://www.thefixedincome.com/products/government-securities/state-
government-bonds

• Benefits of investing in State Government Guaranteed Bonds

• For issuer:
• Despite having lower creditworthiness, the issuer can raise capital via
issuing State Government Guaranteed Bonds.
• As State governments do not collect the fee for guaranteeing the bonds
hence borrowing cost reduces significantly.
CONT….
• For the investor:
• In the case of the State Government, Guaranteed Bonds state government
will pay the interest and principal amount if the issuer defaults.
• Most of the time, the State Government Guaranteed Bonds pay higher
coupon rates than their counterparts.
• State Government Guaranteed Bonds are considered as senior debt
securities as the guarantee given by the State Government is unconditional
and irrevocable.
• A state-owned enterprise going bankrupt is very rare; nevertheless, if the
issuer goes bankrupt, then bondholders of State Government Guaranteed
Bonds are paid before the owners of non-guaranteed debts.
• The State Government Guaranteed Bonds are always in demand; hence
liquidity of these bonds is very high.
• These bonds pay coupons quarterly or biannually
EXAMPLE
MONEY MARKET INSTRUMENTS
CALL MONEY MARKETS
• Call money, also known as "money at call," is a short-term financial loan
that is payable immediately, and in full, when the lender demands it.
• Unlike a term loan, which has a set maturity and payment schedule, call
money does not have to follow a fixed schedule, nor does the lender have
to provide any advanced notice of repayment.
• Call money is a short-term, interest-paying loan from one to 14 days made
by a financial institution to another financial institution.
• The funds can move quickly between lenders and brokerage firms. For this
reason, it is the second most liquid asset that may appear on a balance
sheet, behind cash.
• Dealing in call money allows banks the opportunity to earn interest on
surplus funds.
• The transaction cost is low, in that it is done bank-to-bank without the use
of a broker.
 CALL MONEY MARKET PARTICIPANTS

Borrowing Lending
• Participants in call/notice money market currently include
1.Scheduled Commercial Banks Scheduled Commercial Banks
banks, PrimaryBanks
2.Co-operative Dealers (PDs), development
Co-operative Banksfinance
institutions, insurance
3.Primary Dealers (PDs) companies
Primaryand select
Dealers mutual funds
(PDs)
Select all-India Financial Institutions
Select Insurance Companies
Select Mutual Funds

Participants in the call money market are banks and related entities specified by the RBI.
Scheduled commercial banks (excluding RRBs), co-operative banks (other than Land
Development Banks) and Primary Dealers (PDs), are permitted to participate in call/notice
money market both as borrowers and lenders.
Money Market both as Lenders and Borrowers

• All Scheduled Commercial Banks (excluding RRBs).

• All Co-operative Banks other than Land Development Banks.
All Primary Dealers (PDs)
• Discount and Finance House of India Ltd.
• Securities Trading Corporation of India Ltd.
• PNB Gilts Ltd.
• Gilt Securities Trading Corporation Ltd.
• ICICI Securities and Finance Company Ltd.,
• ABN Amro Securities (India) Pvt. Ltd.
• J.P. Morgan Securities India Pvt. Ltd.
• Kotak Mahindra Capital Company (Unlimited)
• DSP Merrill Lynch Ltd.
• Deutsche Securities (India) Pvt. Ltd.
• IDBI Capital Markets Services Ltd.
• Corpbank Securities Ltd.
• HSBC Primary Dealership (India) Pvt. Ltd.
• Bank of America Securities Pvt. Ltd.
• Standard Chartered - UTI Securities India Pvt. Ltd.
• BoB Capital Markets Ltd.
• Citicrop Capital Markets Ltd.
List of Institutions Permitted to Participate in the Call/Notice

A. Financial Institutions
• Export Credit Guarantee Corporation of India Ltd.
• Export Import Bank of India
• Industrial Development Bank of India
• Industrial Finance Corporation of India Ltd.
• Industrial Investment Bank of India
• National Bank for Agriculture and Rural Development
• National Housing Bank
• Small Industries Development Bank of India
• Special Undertaking of Unit Trust of India
• Tourism Finance Corporation of India
Insurance Companies
• General Insurance Corporation of India
• ICICI Prudential Life Insurance Co.
• Life Insurance Corporation of India
• National Insurance Co.
• New India Assurance Co.
• Oriental Insurance Co.
• Royal Sundaram Alliance Insurance Co. Ltd.
• United India Insurance Co.
• IFFCO -TOKIO General Insurance Co. Ltd.
Mutual Funds

• Alliance Capital Mutual Fund

• BOB Mutual Fund
• BOI Mutual Fund
• Birla Mutual Fund
• Canbank Mutual Fund
• Chola Mutual Fund
• DSP Merrill Lynch Mutual Fund
• Escort Mutual Fund
• GIC Mutual Fund
• HDFC Asset Management Co. Ltd.
• IDBI Mutual Fund
• IL and FS AMC Mutual Fund
• ING Assets Management
• JM Capital Management
• Jardine Fleming Mutual Fund
• Kotak Mahindra Mutual Fund
• LIC Mutual Fund
• Morgan Stanley Mutual Fund
• PNB Mutual Fund
• Prudential ICICI Mutual Fund