What are Indian Government Treasury Bonds? Are they a good investment for you?
The Reserve Bank of India (RBI) on August 5, 2022 announced that it will hold the auction of government treasury bills worth Rs 21,000 crore.
The RBI announced in a press release that bids for the auction are expected to be submitted electronically on its central banking solution system (e-Kuber) on Wednesday, August 10, 2022, while payment by successful bidders is due on Thursday , August 11, 2022.”
Bidding will be price-based and will be conducted using multiple pricing methods. The RBI has also fixed the time slots for placing competitive and non-competitive types of bids. Competitive bids will be open for one hour from 10:30 a.m. to 11:30 a.m., while non-competitive bids will have a half-hour window from 10:30 a.m. to 11 a.m.
Now, what are treasury bonds to start with?
What are treasury bills?
Treasury bills or treasury bills are money market financial instruments and are short-term in nature. They are issued by the Indian government and are zero-coupon debt securities and as such do not pay interest.
Ankit Gupta, founder of BondsIndia.com, a bond buying platform, explained what zero coupon type of debt instrument means.
“Zero coupon means that they will pay no interest at maturity, but these instruments (treasury bills and others) are issued at a discount to their face value. The difference between the issue price and the face value is an investor’s gain in real terms.For example, if a treasury bill with face value or nominal value of Rs. 10,000 is sold for Rs. 9,000, then the interest it offers is Rs. 1,000,” he says.
Harish Menon, co-founder of House of Alpha Wealth Management, said that currently treasury bills are issued in terms of 91 days, 182 days and 364 days. So, if someone or an institution wants to park their money and earn short-term interest, treasury bills are a good option.
Should you opt for treasury bills?
Menon indicated that anyone with an investment horizon of up to a year to achieve their short-term goals and not willing to “take any type of risk in their investments” can consider investing in treasury bills. .
Menon added that if anyone says they will get better returns in credit risk bonds and why should they invest in treasury bills, it is important to know that treasury bills are issued by the Indian government. and, therefore, bear no maturity risk, whereas credit risk bonds do not.
“It’s not that credit risk bonds will always default, but in the rare event that they do, you may suffer a loss on your investment, which will never happen in the case of treasury bills. . Treasury bills will always have a 100% redemption option,” adds Menon.
Treasury bills or fixed deposit?
Menon shared an interesting comparison, in which he pointed out that treasury bills can also be compared to short-term fixed deposits (FDs). One can also make an FD, for example, three to six months or even a year.
That said, treasury bills have the added benefit of being open for sale in the secondary market (provided the liquidity and desired price are good enough). In the case of an FD, if you liquidate it before maturity, the bank may charge a fee.
How to buy treasury bonds in India?
Gupta said retail investors in India can purchase treasury bills by opening a “retail direct program account” with the Reserve Bank of India (RBI).
Apart from this, retail investors can also buy treasury bills on the stock exchange and other primary and secondary markets.
Menon, however, pointed out that liquidity is an issue when someone tries to sell their Treasuries early, i.e. before maturity. This is because the order price at which you might want to sell the respective treasury bill may not be matched by any buyer, and then you either need to adjust the price to match the closest the offer of the buyer or cancel the transaction.
Money market mutual funds are also an option for retail investors to purchase treasury bills. Menon pointed out that money market funds invest in a variety of money market instruments, not just treasury bills. Therefore, if an investor only wants to buy treasury bills and nothing else, the RBI platform is the best gateway.
How many treasuries has RBI sold recently?
According to data released by the RBI on August 3, 2022, the 91-day treasury bill had a notified issue amount of Rs 9,000 crore and 115 bids were received worth Rs 32,740.21 crore. The weighted average price/yield ratio for this 91-day Treasury bill was 5.4898%.
For the 182-day treasury bill, the notified amount was Rs 7,000 crore and 123 bids were received worth Rs 26,478.80 crore. The weighted average price/yield ratio for this 182-day Treasury bill was 5.8765%.
For the 364-day treasury bill, the notified amount was Rs 5,000 crore and 170 bids were received worth Rs 28,259.40 crore. The weighted average price/yield ratio for this 364-day Treasury bill was 6.2140%.