Bond Markets and Liquidity: Feasibility of a Debt Exchange Market

Buying bonds is like giving a loan to the issuer. The longer the investment term, the bond gives a higher assured interest. Hence, bonds are often considered safer investments than investing in stocks. But they have a lower interest rate than the return on stock investments. Bonds may be issued by government or corporation with a certain maturity date, an assured yield or interest on the loan that varies with the holding period.

How To Get Bonds and What are Coupon Rates?

When bonds are issued by corporations, usually banks, security firms or other financial institutions create a syndicate and buy them sell them to retail investors. Whereas in government auctions, bond issue is open for bidding by financial institutions and individual investors.

The bond price is dependent on the market because the price is dependent on its purchase price decided on bidding for it. The coupon rate of a bond is decided in advance before the bond issue. It is the yield on the bond paid by the issuer on its issue date.

The bond price is decided by the following factors:

1. Demand and supply of other assets in the market

2. Various economic conditions

3. Existing as well as the future rate of interest and

4. Credibility of the bond issuer in the market

The yield to maturity (YTM) of a bond is the approximate percentage return on the bond principal if the investor holds it till its maturity. The coupon rate is the percentage return the investor gets on the principal for holding it for a certain period of time (if the investor sells the bond prior to its maturity date).

The Bond Market And The Stock Market Trends

There is generally an inverse relationship between the bond and the stock market. In a booming economy, the stock market performs better than the bond market. In a slowdown situation when the market underperforms, investors feel insecure due to bearish stock market trends. They prefer investing in secure products like bonds that assure a fixed interest on their principal.

There are certain extreme situations when both the bond and stock market rises. This happens when there is more money or liquidity in the market with fewer investment options.

The Current Status Of Liquidity

The liquidity of the Indian bond market is a positive sign for bond traders as they anticipate fresh gains due to escalating government borrowing to support the country’s slow economy. According to experts, the bullish bond market will incur huge benefits from rate cuts, the liquidity in the banking system and government clarification on more borrowings. Like the US, our country’s central banking system plans to make good the fiscal deficit by buying bonds and boost the stock market. This will raise the bond value and reduce interest rates. As a result, borrowing will be cheaper and companies will expand, households will start spending which will bring money in circulation. Besides investors will focus more on buying stocks for better returns on their investments.

The New Way to Invest in Bonds: NSE GoBID

Recently Securities and Exchange Board of India (SEBI) launched the NSE goBID (Securities and Exchange Board of India’s Government Bond Investment Destination) - an online trading platform for debt instruments. It is a mobile application where individual investors can trade government securities.

After SEBI permitted the exchanges to create non-competitive platforms the launch of this app is a milestone in our country that promotes digital payments. This app will allow trading in Treasury Bills for the following terms- 3 months to 1 year and bond investments for up to 40 years.

Till now the participation of retail investors in government securities has been very low. This method of online trading of bonds will enable higher trades in this sector. Under SEBI’s guidelines and supervision, this app will be improved further to cater to the needs of trading in coordination with the exchanges. It is made accessible to NSE registered investors and members who have access to individual investors.  

In December 2018, the Bombay Stock Exchange (BSE) launched a trading interface called BSE-Direct for similar reasons. G-Sec is better than fixed deposits (FDs) offered by banks as they have assured returns and deduct taxes at source (TDS). Besides government bonds are issued for a longer-term than bank FDs and these investments are best for maintaining a diversified portfolio of retail investors.

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