The recent Monetary Policy Review saw Reserve Bank of India’s first rate hike in more than four years, a change in stance that saw 10 year benchmark G-sec yield almost touching the 8% mark for the first time in 3 years (since June 2015). The 10-year benchmark G-sec acts as a fair indicator of the investors’ sentiment of the Indian fixed income market. The benchmark yield has seen the steepest per year increase in yield in recent times with ~180 bps hardening since the trough of 6.18% achieved in November 2016.
Domestic debt market has been primarily dominated by Government securities. In FY17-18, the amount outstanding in Government securities reached Rs. 53.2 trillion representing a sizeable market share of ~65% in sovereign debt market (constituting G-secs, T-bills and State Development Loans) and ~45% in the entire Indian fixed income market. With an average ~30% share of secondary market trades in the Indian G-sec market, the ‘on-the-run’ 10-year benchmark G-sec represents the most liquid maturity segment of the G-Sec market.
The NIFTY 10-year Benchmark G-Sec Index captures the price change and accrued interest of on-the-run 10-year G-Sec. Additionally, NIFTY 10-year Benchmark G-Sec (Clean Price) Index captures only the price change of ‘on-the-run’ 10-year G-Sec.
Exhibit 1: Performance of NIFTY 10-year Benchmark G-sec index during various phases
*Data ended June 7, 2018
#Returns reported during Phase 3 are absolute returns for the 5 month period from August 2008 to December 2008.
By Vijeta Singh
Green bonds are like regular bonds, but the money raised from these bonds goes towards the funding of ‘green’ business activities or projects in fields such as renewable energy, sustainable waste management, etc. These bonds are generally certified by Green Bond Principles (issued by International Capital Market Association) and Climate Bond Standards (issued by Climate Bonds Initiative) to ensure they are to finance projects that would generate environmental benefits.
These bonds can be in different forms, the most common being the full recourse green bond which is earmarked exclusively for environmentally beneficial projects. There are other varieties such as green ‘use of proceed’ revenue bonds and green securitized bonds.
Meaning – A correction is a reverse movement, usually negative, of at least 10% in a stock, bond, commodity or index to adjust for an overvaluation. The latest stock market correction occurred on February 8, 2018 as the DJIA and the S&P 500 fell more than 10% from their recent highs hit in late January, 2018.
Corrections are generally temporary price declines interrupting an uptrend in the market or an asset. A correction has a shorter duration than a bear market or a recession, but it can be a precursor to either. A correction is very different from a crash since it measures the percentage decline from the most recent high. A crash is generally considered to be a 10% or more decline, irrespective of the most recent high. For investors, corrections provide a chance to see how truly comfortable they are with market risk, and to make changes to their portfolio if warranted. They also provide investors with an opportunity to potentially add companies at discounted prices, or to dollar cost average down on existing positions.
Meaning – A gypsy swap is a unique method by which a company may raise capital without issuing debt or holding a secondary offering. In many respects, a gypsy swap is similar to a rights offering, except that the restricted party’s equity claim does not elapse and the swap instantly becomes dilutive.
The gypsy swap is broken into two parts:
1. An existing shareholder exchanges freely traded shares for restricted shares (shares restricted by time and/or price constraints) from the issuing company. In economic terms, the existing shareholder neither gains nor loses money from the transaction, although it may have tax consequences.
2. The issuing company then sells the existing shareholder’s freely traded shares to a new investor(s) at a price that may be higher or lower than the current market price. The issuing company now has additional capital and the new investor(s) has equity in the issuing company.
In almost every case, a gypsy swap is a last-ditch financing option because the new investor(s) almost always demands some combination of below-market value price or special consideration from the deal.
Meaning – The additional interest rate an investor receives when selling a lower-yielding bond in exchange for a higher-yielding bond.
The bond with the lower yield generally has a shorter maturity, while the bond with the higher yield will typically have a longer maturity. A certain amount of risk is involved since the bond with a higher yield is often of a lower credit quality. Additionally, the investor can be exposed to interest rate risk with the longer maturity bond. For example, an investor owns a bond issued by Company ABC that has a 4% yield. The investor can sell this bond in exchange for a bond issued by Company XYZ that has a yield of 6%. The investor’s yield pickup is 2% (6% – 4% = 2%). Ideally, a yield pickup would involve bonds that have the same rating or credit risk, though this is not always the case.