Gilts

The yield of the 10 year G-Sec, a benchmark in a way, is at 5.27% as per Reuters.

Indian federal bond yields tumbled to their lowest since May 2004 on Tuesday as expectations grew the central bank would cut rates, while speculation of a reduction in fuel prices lifted sentiment for debt.

The benchmark 10-year bond yield closed at 5.27 percent after touching an intraday low of 5.25 percent, its lowest since May 2004. It had closed at 5.55 percent on Monday.

Gilt funds should go strongly up. I've already got a 10% return on my (phased) investment into the ICICI Prudential Gilt Plan, in 1.5 months. I'm holding for another 20-30% return within a year.

Note: I have been told by two people now that ICICI's mutual fund arm is pushing it's "income plan" whenever they want to invest in the Gilt fund. The income plan has much higher costs (the fees are 2x the Gilt plan, nearly) and invests a good chunk in corporate bonds too. Now they say corp bond yields will come down as well, because the spread is too high. If you look at the US - a much more developed market - corp bond yields are still very high and gilt yields are at all time lows. The spread need not ever come down, and in India we will see our share of corp defaults.

Plus the income fund has a 2% exit load (versus only 0.75% for the gilt fund).

So I would never go with the income plan - I'd stick with the basis. Gilt is gilt, and only gilt.

I actually got in only in Mid-November, with a substantially larger amount of money than I had initially planned, into Prudential ICICI's Gilt Fund (Investment Plan). The fund has done real well and is fully invested in G-Secs. I show two points - one when I should have entered (showing off) and one when I did.

The fund has returned 10% in a month, and nearly 20% since October. (I have only got about 7% due to my staggered entry, but who's complaining) I invested in the dividend payout option, where they paid out 5% of the existing NAV in November. The NAV fell 5% then - and since has recovered to go about 2% above the buy price. And, the dividend is tax free. Double the happiness.

I'm holding, for the next year or so. Using complex mathematics that can blow a hole in your wall, I have found that a further 1% drop in yield can lead to another 7% gain in prices. All we need is dropping inflation and more problems with growth; not entirely off the cards, one thinks.

There is risk in gilt funds. Being highly liquid they are marked to market every day, and if there is a flight away from quality the yields may go up. Unless inflation rears its head again, I doubt we will see yields increase (which will depress bond prices). Still, one must remember that these aren't "floaters" - there is a chance you will lose money in a gilt fund.

Indian federal bond yields dived to three-year lows on Wednesday after China's rate cuts spurred expectations the central bank would soon follow suit, encouraged by forecasts of a further dip in inflation.

I wonder if I can buy G-Sec's directly - I saw a paper ad today by ICICI about how you can buy GOI bonds, but these are not tradeable and you won't benefit by falling yields. Typically a 1% drop in interest rates increases prices by 1-2% (dropping yields by that much) But if you can't sell your bonds (i.e. if your bonds are "not tradeable in secondary market") then you don't get any advantage.

The ICICI web site says GOI 2003, and I assume that's a WTF.

I'm not quite sure but right now I think corporate bonds will be a good buy if the secondary market has trades. I don't know why we don't promote that market - bonds are a fantastic set for trading, and today bond trades can dramatically change the marketplace especially if we allow derivatives on them (bond futures, interest rate futures and options etc.)

The establishment is not in favour, obviously, because this is their turf. Neither is the government - why else would these bonds be non-tradeable, and non transferable? But these are lame excuses. Still, I don't know how to answer the very basic question: if less than 3% of Indian savings are in stocks, why will anyone bother with bonds?

We can't force people to invest; we can only make it attractive. Today there is so much "value", and we have no long term capital gains taxes, we have much lower transaction costs than, say, 1998, and yet, very little new money is coming in. (Although, says SEBI chief Bhave, we've seen retail pouring in over 5000 cr. in the last few months. Wow)

Bond funds then, will have to do. Most of them are not honest. The Gilt funds invest in fixed deposits, the bond funds do shady deals and mask them with illegible names and all sorts of weird things are happening out there - please keep yourself informed of fund portfolios before you invest.

The cash reserve ratio (CRR) of scheduled banks is currently at 7.5 per cent of their net demand and time liabilities (NDTL). On a review of the evolving liquidity situation, it has been decided to reduce the CRR by 100 basis points to 6.5 per cent of NDTL with effect from the current reporting fortnight that began on October 11, 2008. This measure will release additional liquidity into the system of the order of Rs.40,000 crore.