While volumes in the highly liquid 10-year benchmark government bond have predictably increased, what distinguishes the current spate of foreign inflows from other episodes of global investment is a higher degree of transactions in traditionally illiquid securities, referred to as ‘off-the-run’ bonds in trading parlance.
Foreign investment in index-eligible government bonds has climbed by close to $14 billion since JP Morgan announced India’s inclusion in one of its indices in September 2023. The inclusion process commenced on June 28.
“What it (index inclusion) has also done is that it has made liquid a lot of the off-the-run securities. Now, if I look back before the index inclusion, and I look at the inventory of bonds in the books of my traders, it used to be just two or three bonds,” said Manish Luharuka, head of the proprietary trading group at ICICI Bank, at an industry event on Friday.
“Those were the bonds which were most liquid, the three-year, five-year and 10-year benchmark. That has changed completely because what they (traders) are looking at in terms of the queries they are getting from offshore investors – is across the curve,” he said.Traditionally, secondary market trading liquidity in domestic bonds has been heavily skewed in favour of the 10-year benchmark bond which accounts for a lion’s share of overall trade volumes.An analysis of the latest monthly data published by the Clearing Corporation of India (CCIL) showed sharp increases in the average daily trading value of several securities that are no longer regularly auctioned by the government and as such qualify as ‘off-the-run’ bonds.One reason why the JP Morgan index-related flows have brought about greater trading liquidity is that several investors have been purchasing bonds across the yield curve to minimise index “tracking errors”, treasury executives said. The tracking error gauges the degree to which a bond portfolio tracks the index to which it is benchmarked.
AgenciesIn June 2024, the average daily trading value of the 7.32% 2030 bond was ₹3,086 crore, 291% higher than ₹789 crore in March, at the end of FY24.
The 7.26% 2033 bond – a former 10-year benchmark security which had long ceded ground to a new benchmark bond – saw its volumes rise to ₹1,202 crore in June from ₹497 crore in March. Two other papers – the 7.30% 2053 bond and the 7.26% 2032 bond – also saw sharp increases in their volumes.
Further, the data showed that for 13 out of 23 securities, the average daily trading value in June was higher than that over the past 12 months.
With pockets of trading liquidity being gradually unlocked across the sovereign bond yield curve, price discovery for debt products across the economy becomes more efficient as the “impact” cost of transacting in illiquid bonds goes down, given more readily available quotes on both sides. Sovereign bonds are the benchmarks for pricing corporate debt.
“A key objective of the Reserve Bank has been to foster a robust Gsec market and yield curve, which I have often referred to as a public good,” RBI Governor Shaktikanta Das said in April.