Government Bonds

Government Bonds

This article covers ‘Daily Current Affairs’ and the topic details of ”Government Bonds”. This topic is relevant in the “Economy” section of the UPSC CSE exam.


Why in the News?

State governments recently raised a record Rs 50,206 crore through State Development Loan (SDL) Bond auctions, surpassing the Rs 27,810 crore target. This signals a strong demand for state government securities, which are part of Government Securities (G-Sec), issued similarly to Central Government securities.


About Bonds

  • Within the financial system, bonds serve as debt security utilised by governments and corporations to procure capital. 
  • Functioning similarly to an IOU (an informal acknowledgement of debt), a bond represents a loan agreement between the issuer (borrower) and the investor (the creditor).
  • By purchasing a bond, the investor extends credit to the issuer in exchange for a predetermined future repayment with interest.


Government Bonds

 Government bonds, often called G-Secs in India, Treasuries in the US, or Gilts in the UK, are considered some of the safest investments. This is because they are backed by the issuing government’s guarantee, reducing the risk of default. Here’s a breakdown of some common G-Secs:


Treasury Bills (T-Bills): These are short-term loans issued at a discount and redeemed at face value upon maturity. They don’t offer regular interest payments, but you earn a return based on the difference between the purchase price and the redemption value.


Cash Management Bills (CMBs): Introduced in India, CMBs are ultra-short-term instruments used by the government to manage temporary cash flow imbalances. Their maturities are even shorter than T-bills, typically under 91 days.


Dated G-Secs: These are longer-term bonds offering fixed or floating interest rates (coupon rates) paid twice a year. They provide investors with predictable income streams over periods ranging from 5 to 40 years.


State Development Loans (SDLs): Beyond G-Secs, some states in India may issue State Development Loans (SDLs). These function similarly to dated G-Secs but are backed by the creditworthiness of the issuing state instead of the national government.


Bond Yield

A bond’s yield represents the effective annual return an investor can expect to earn on their investment. Unlike some financial instruments, bond yields are not predetermined but rather possess a dynamic nature. This means they can fluctuate based on the prevailing market price of the bond itself.

To delve deeper into bond yields, it’s essential to comprehend the fundamental structure of a bond. Each bond is characterised by three key components:

  • Face Value: This pre-defined sum represents the amount of money that will be repaid to the investor upon the bond’s maturity.
  • Coupon Payment: This signifies the fixed amount of interest distributed to the bondholder at periodic intervals, typically occurring twice a year.
  • Market Price: In contrast to the face value, the market price of a bond is not fixed. It can deviate based on various factors influencing supply and demand within the secondary market where bonds are traded.


It’s important to note that bonds also have a coupon rate. This fixed annual interest rate is expressed as a percentage of the bond’s face value and serves as the basis for calculating the coupon payment.


The Yield Curve: A Graphical Insight into Investor Expectations

  • The yield curve is a critical tool in fixed-income analysis, presenting a visual representation of interest rates for bonds with varying maturities. In essence, it depicts the returns that investors anticipate for lending their money over different time frames.
  • This curve serves as a valuable economic indicator, particularly when its shape transforms. A noteworthy shift to an inverted yield curve, where short-term rates exceed long-term rates, can signal a potential economic slowdown.
  • This inversion suggests that investors may be prioritising the security of shorter-term investments, potentially anticipating future interest rate cuts by the central bank or a weakening economy that could lead to reduced long-term returns.


Factors Influencing the Yield Curve

Market Demand and Bond Prices: Consider a scenario where there’s only one bond available, but multiple buyers are interested. This competition among buyers can drive up the bond’s price during bidding.

Alignment with Economy’s Interest Rate: When the prevailing interest rate in the economy differs from the bond’s initial coupon payment, market dynamics adjust the bond’s yield to align with the current interest rate.

Analogy: When the economy’s interest rate exceeds the bond’s yield, it’s akin to placing a heavier weight on the side, representing the economy’s interest rate in a seesaw analogy. This imbalance causes the seesaw to tilt towards the economy’s interest rate side, indicating that the bond’s yield is comparatively lower.

Download Yojna daily current affairs eng med 26th March 2024


Prelims practise questions 

Q.1 In the context of the Indian economy, non-financial debt includes which of the following? 

  1. Housing loans owed by households
  2. Amounts outstanding on credit cards
  3. Treasury bills

How many of the statements above are correct?

(a) Only one 

(b) Only two

(c) All three 

(d) None


Answer: C


Q.2 Consider the following statements: 

  1. The Reserve Bank of India manages and services Government of India Securities but not any State Government Securities.
  2. Treasury bills are issued by the Government of India and there are no treasury bills issued by the State Governments.
  3. Treasury bills offer are issued at a discount from the par value.

Which of the statements given above is/are correct?

(a) 1 and 2 only

(b) 3 only

(c) 2 and 3 only

(d) 1, 2 and 3


Answer: C


Mains practise question


Q1. Do you think a focus on high bond yields can be detrimental to long-term infrastructure projects in a country? Why or why not?


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