Fixed Income Securities Markets:

An Overview
Dr HK Pradhan
XLRI Jamshedpur

Key Components of Debt Markets

• Issuers
• Investors
• Instruments
• Intermediaries
• Infrastructure
• Market regulations
• Benchmark reference rates
• Primary & secondary markets
• Coordination & monetary policy issues

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 Role of Debt Markets
• Facilitates government financing and its roll over
• Low
Low-cost
cost financing opportunities for the government
• Governments use special purpose securities for raising
resources for specific purposes (Relief bonds, Oil bonds..)
• Meets long-term investments needs for infrastructure
• Banks and financial institutions invest in debt instruments to
meet their statutory requirements
• Eases
E over-concentration
i off credit
di risk
i k andd funding
f di
mismatch in the banking system
• Provident funds, pension funds, insurance companies
require long term instruments, invest in debt markets

Role of Debt Markets

• Debt markets provide an assured rate of return for buy-hold
investors
• Household prefer bank deposits, savings schemes, and to an
extent debt instruments
• Sub-sovereign entities (state, local and state sponsored SPVs)
extensively use debt markets for financing & investments
p
• Corporate raise moneyy thro debt markets ((CPs, debentures,
bonds)
• Mutual funds, ULIPs invest in debt related instruments
• FIIs too allowed to invest in debt markets, though to a
limited extent

2
Debt market serves as important
conduits for monetary policy
• Key
ey route
oute for
o monetary
o eta y po
policy
cy app
applications
cat o s
• Management of liquidity in the financial markets
– Statutory liquidity requirements for banks and financial
institutions are met using government securities markets
• Debt markets signal long run prospects of the economy
• Signals inflationary expectations, in term structure of interest
rates
• Links money markets and foreign exchange markets

3
 Classification of Debt Securities
By Issuers
– Central Government, State Governments, Municipal Corporations, PSUs, PFIs,
Corporate
By Instruments
– T Bills, Cash Management Bills, G Secs, SDLs, Municipal Bonds, Corporate
bonds, FIBs
By Interest rates
– Fixed rate issues, Floating rate issues, Zero coupons, inflation indexed bonds
By Maturity
– Bonds with 2 or more years tenor, money market instruments (T Bills, CPs)
By Optionality, Structured Obligations
– Calls,
Calls Puts & Convertibles,
Convertibles ABS
By Tax features
– Taxable, non-taxable bonds
Sectoral/Special bonds
– Sectoral bonds, PUSs, Bank bonds, special purpose bonds
By Derivatives
– FRAs, IRFs, OIS, IRFs, Caps and Floors

4
Debt Market: Selected Indicators

5
 Government Securities serve important
purposes
• Yields on government securities serve important purposes
– G Sec yields represent indicators of risk free rates
– Government securities yields serve as benchmark yields for
rest of the sector
– Used for derivative pricing
• Government securities can be used to meet liquidity needs of an
institution
• Government securities can be used as collateral to borrow funds
in the repo/CBLO market

Major Players
• Issuers (typically Governments, Corporations, Municipalities,
Banks and FIs)
• Investors
I or the
h buy
b side
id institutions
i i i
– (banks, financial institutions, Pension Funds, Mutual Funds,
Debt Funds, Reserve Bank of India, Insurance Companies,
etc. )
• Foreign Institutional Investors
• Primary Dealers
• Inter-dealer
I t d l Brokers
B k
• Rating Agencies
• Reserve Bank of India

6
Institutional Arrangements
• Regulator
– Government of India (through the Public Debt Act of 1944, replaced
with GS Act, 2006) empowers RBI to regulate primary issuance of
debt securities
securities, issuance and redemption; Lien/Pledge /Hypothecation,
/Hypothecation
STRIPS
– SEBI regulates primary issuance of debt securities other than
government securities
• Trading
– Direct, Broker driven (OTC markets generally predominate)
– Anonymous Order Driven
• Platforms
– NDS-OM/NDS-Call/CBLO/CROMS
– NDS-OTC
• Clearing
– CCIL

7
 Organization
• Negotiated Dealing System (NDS)
– NDS of RBI pprovides an electronic platform
p for negotiating
g g trades in
government securities.
• NDS– Order Matching (NDS-OM)
– NDS-OM is an electronic, screen based, anonymous, order driven
trading system, introduced by RBI as part of the existing NDS system to
facilitate electronic dealing in government securities
• WDM Segment of NSE Trading System
– NSE’s Wholesale Debt Market (WDM) segment offers a fully automated
screen based trading platform through the NEAT (National Exchange for
Automated Trading) system
• Stock Exchanges
– If a broker is involved, the trade is reported to the concerned exchange
– BSE and NSE to have in place corporate bond trading

RBI operates both as the monetary authority

and the debt manager to the GOI
• Debt manager (debt management functions are undertaken at the
IDM cell of the RBI)
– Issuer & custodian of government bills and securities
– Manages servicing and redemptions
– Raises funds on behalf of the state governments
• Monetary Authority (monetary policies for price stability and
liquidity management)
– Open-market
Open market operations (OMO)
– Bank rate policy
– Repo/Liquidity Adjustment facility (LAF)
– Market Stabilization Schemes (MSS de-sequestering recently)

8
 Demand and Supply
• Long
o g Term
e Securities
Secu t es
– Budget financing
– Redemption
• Short Term Securities
– Treasury Bills, Cash Management bills
• Moderating variables
– OMOs,
OMOs Repos,
Repos MSSMSS, LAFs
• Cash management (pattern of taxes/Government
expenditures
– expenditures are front loaded, whereas tax collections gather
towards year-end

Net Supply of Issuances – 2009-10

GOI Borrowings : 1st Half of the FY 2009-10

(Dated securities)
(Rs.crore)
Item 2007-08 2008-09 2009-10

Gross Market Borrowings 97,000 106,000 299,000

Less : Repayments 30,554 44,028 33 089

Net Market Borrowings 66,446 61,972 265,911

Less : OMO Purchases 0 0 80,000

Less : MSS Unwinding * 0 0 42,000
Add : MSS Issuances (net)* 69,077 5,263 0
Net Supply of Fresh Securities 135,523 67,235 143,911

* Includes dated securities and Treasury Bills

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 G Sec Operations
• G-SECs issued by the Order of the President of India
thro the Ministry of Finance(Department of Economic
Affairs: Budget Division)
• RBI manages the entire government debt operations at
its IDM
• Both the initial sale of securities and subsequent
transfers are handled by the RBI
• Settlement thro a computerized book-entry
book entry system
called the SGL and constituents SGL Accounts
• Settlement System is Delivery versus payment
(DvP)/RTGS with T+0, T+1 as the conditions of deals

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SEBI regulates the debt instruments
listed on the stock exchanges.
• All government securities are ‘deemed’
deemed listed as and when
they are issued.
• SEBI issues guidelines for corporate debt issuance and
also for their listing on stock exchanges.
• Secondary market trading of corporate bonds are
conducted as per the rules set by SEBI
• Privately
P i t l placed
l dddebt
bt paper off b
banks,
k iinstitutions
tit ti and
d
corporates requires an investment grade credit rating to
be eligible for listing

www.fimmda.org
• Self regulatory organization
• Market follows FIMMDA practices
• Valuation methods prescribed for the markets
• FIMMDA/PDA/Bloomberg yield curve used by
markets
• FIMMDA
FIMMDA-CRISIL
CRISIL Spread matrix for corporate bond
pricing
• FIMMDA corporate bond valuer

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 • FIMMDA
FIMMDA, PDAI & Bloomberg Prices of GOI Securities
FIMMDA Corporate Bond Spread Matrix FIMMDA
Corporate Bond Traded Data & Spreads FIMMDA
Moneyline Telerate India Commercial Paper FIMMDA
Moneyline Telerate India Treasury Bill FIMMDA State
Loan Calculator FIMMDA NSE MIBID/MIBOR FIMMDA
Reuters MIFOR, MIOCS, MIOIS and MITOR

Primary Dealers
• Primary Dealers are those banks & securities firms that are
approved to transact directly with the Reserve Bank in auctions.
• Advantage of primary dealer system is that the Reserve Bank
will be in a position to conduct its auctions efficiently with a
small number of well capitalized institutions.
• Primary dealers are expected to
– Participate in auctions
– Underwrite Auction
– Act as "Market
Market Makers
Makers”
– RBI provides liquidity support (LAF)
– PDs have access to the RBI’s open market operations
– PDs are permitted to borrow and lend in the money market

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 Primary Dealers
A Bank PDs
1 Citibank N.A.,
2 Standard Chartered Bank
3 Bank of America N.A.
4 J P Morgan Chase Bank, N.A.
5 HSBC Bank
6 Bank of Baroda
7 Canara Bank
8 Kotak Mahindra Bank Ltd.
9 Corporation Bank
10 HDFC Bank
B Stand alone PDs
1 IDBI Gilts
2 ICICI Sec P D Ltd.
3 PNB Gilts Ltd.
4 SBI DFHI Ltd
5 STCI PD Ltd
6 ABN AMRO Securities (India) Pvt
7 Deutsche Securities (India) Pvt Ltd
8 DSP Merrill Lynch Securities Trading Ltd
9 Lehman Brothers Securities Pvt.Ltd.

Government Debt Issuance

• Half-yearly issuance calendars
• Rationalization of Issuance (auction formats,
formats frequency
frequency, size of
issuances, allocation among specific instruments, acceptance
criteria, etc)
• Development of yield curve, efforts to issue longer maturities
up to 30 years
• Passive Consolidation ( reissuances/ reopening) Restructuring
• Buyback of illiquid securities & reissue of liquid securities
– (reverse
( auction,
ti switch/swap,
it h/ secondary
d market
k t purchase)
h )
• Primary Issuance (underwriting commitments from PDs,
liquidity support..)
• Short sales permitted
• When Issued introduced

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14
Treasury Bills
• Instruments of short-term borrowings of Govt.
• Maturity –91, 182 and 364 days
• Issued
I d att a discount
di t through
th h auction
ti bby RBI andd
redeemed at par
• Serves as a bench mark for short-term securities
• All issuance of T-Bills (including under MSS & LAF)
run online on PDO-NDS system
• Multiple Price based Auction
• Demand for T-Bills inversely related to call rates
• Repo transactions permitted in all T-Bills
•

Benchmarks
• Government Securities issued keeping in view the
yield curve development, liquidity positions,
minimizing roll over risk, benchmark & YC
implications
• Benchmarks is a product of market as well as RBI
operations

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 Benchmark Bonds
• Government maintains large benchmarks in bonds across
maturities,, in order to p
promote market liquidity
q y
• Reopen an issue in an auction to create

• Adequate availability of benchmark securities

– Benchmark
h k iissuance focus
f more on supply
l off bonds
b d across
maturities
– Re-issuance/re-opening be tailored to market liquidity
– Lengthening of the maturity helps develop the secondary debt
securities market

Issuing benchmarks across the yield curve

ƒIn the absence of benchmark bonds, market prices may not, therefore,
truly reflect ideal prices
ƒIssue benchmark bonds at the right data points of the yield curve

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State Government Securities
• Until 1998-99 the states issued securities at pre-announced coupon
rates and prices and were issued by the Reserve Bank through
common tranches.
tranches
• Since 1999, an option has been given to the states to raise their
borrowings by way of competitive auctions
• RBI manages state borrowing programmes
• Sub-sovereign issuances, carries implicit guarantees
• The outstanding SDLs increased from 5.9 per cent of GDP (at CMP)
in 2006-07
2006 07 to 66.6
6 per cent of GDP in 2008
2008-0909.
• Number of Securities outstanding as on March 3, 2009 at 1233 (vis a
vis 97 securities of the GoI)
• Security-wise outstanding amount ranges from Rs1.5 Crore (7.02%
Tripura SDL 2015) to Rs.4000 crore (7.83% Maharashtra SDL 2019)

State Sponsored Institutions

• State sponsored institutions include state level

financial institutions, state sponsored special
purpose vehicles (SPVs), and statutory boards
such as Water Supply and Sewerage Boards.
• The instruments are usually known in India as
“structured obligations(SO)”

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 Municipal bonds(ULBs)

• Trends towards decentralization and urbanization

have necessitated borrowings by municipal
corporations
• Municipal bonds have a number of interesting features.
There are two basic types:
– General Obligation Bonds: The government’s
taxation
i authority
h i backs
b k the
h bond.
b d
– Revenue bonds – revenue from a specific project is
used to pay the bonds down
– Tax-free bonds

Municipal Bonds
Municipal issues are in the nature of revenue bonds, with
fixed interest rate, with government guarantee, maturity
7-15 years, are in the form of Structured Obligations(SO)

M unic i pa l C o r po ra t io ns (A m o u nt i n C ro re s o f R upe e s )
M u n ic ip al Is s ue M atu rity C o upo n R atin g A ge nc y A m o unt G u ar an te e
C o rp o ratio n D ate (Y e ars ) (% )
B an g alo re 1 997 7 13 A -(S
(S O ) C R ISIL 1 00 Ye s
A h me d ab ad 1 998 7 14 A A -(S O ) C R ISIL 1 00 No
N as h ik 1 999 7 1 4.75 A A -(S O ) C R ISIL 1 00 No
L u d h ain a 1 999 10 1 3.5 -14 L A A (SO ) IC R A 10 No
N ag p u r 2 001 7 1 3.43 L A A -(SO ) IC R A 50 No
M ad u rai 2 001 15 1 2.25 L A + (SO ) IC R A 30 No
I n d o re 2 001 7 1 1.50 - - 10 Ye s
H yde rab ad 2 002 8 .5 7 A A +(S O ) C R ISIL 8 2.5 No

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 Municipal Bonds With AMC as an Intermediary
Investors

Principal Munici pal

Interest Bonds

AMC Guarantee by
DFIs/MDBs

Bonds

Principal
+ ULBs
Interest Loan/Bonds

Project Cash
Fl ows

Escrow Debt Reserve Fund

Corporate Securities
Co
Commercial
e c a papers,
pape s, Bonds/NCDs/ABS
o ds/NC s/ S
Secured or unsecured debt
Embedded Options: calls, puts
Spread as per ratings
Ratings and rating migration
Securities other than AAA are classified as non-SLR securities
Corporate trustee represents bondholders
May have guarantees(third party’s guarantees)
May have debt service reserve fund/Sinking Fund

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Foreign Issuers in Local Market
• Recent efforts by ADB/WB to issue local currency
bond issuance in China and India
• Such issuances have shown great interest by
local investors

Retail Investors in Debt Markets

• Good avenue
ave ue for
o investment
vest e t
• Highest safety
• Regular stream of income every six months
• Assured yield to maturity if held till redemption)
• Diversification of risk
• Liquidity through trading

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 Secondary Markets
• Banks typically hold a substantial portion for bonds, effectively to
maturity, to a smaller extent for short term trading purpose
• Large portion of HTM portfolio as against the trading portfolio
• Contractual saving institutions mainly focus on long term bonds,
buy-hold investors in general
• Captive nature of holdings create market distortions in yield and
illiquidity (Pension funds, mutual funds, insurance companies)
• Price discovery processes must be as efficient as possible such that
true market prices that accurately reflect conditions in the economy

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22
Reference Rates
• FIMMDA/NSE MIBOR/MIBID
• Call/Repo/CBLO
• MIFOR/OIS/IRS
• NSE/CCIL ZCYC
• NSE/CCIL Bond Index
• FIMMDA/CRISIL Spread Matrix
• NSE Var

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Corporate Bonds Spreads

24
Yield Curve
• NSE ZCYC based on NS
• CCIL ZCYV based on NSS
• FIMMDA/Bloomberg Bootstrapping

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 10-year GOI bond yield

Correlation between Indian and global markets

Dollar Index and Indian rupee

Dollar Index: EUR 57.6%, JPY 13.6%, GBP 11.9%, CAD 9.1%, SEK 4.2%, CHF 3.6%

10-year US treasury and 10-year Indian G-sec

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Yield Curve Stability 2007-09

Reforms
• IRF introduced in August
• STRIPS: upcoming

27
Thank You

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