Data from CCIL shows that last Friday, the 10 year bond yield inched above 9%, which is inching towards the high of 9.35% set in July 08. (Note: that was just one month before it reversed)

The spreads are incredibly tight, but they’ve been that way earlier, in 07-08 as well. For yields to fall, there needs to be either a rate cut or a crisis (when people will run to the safety of government bonds).

one must also remember that this is a semi-annual yield.

It’s annualized. The coupon is paid out semi annually. So you get Rs. 4.20 for a 8.40% bond, every half year. (For those who don’t know, Yield is different from coupon; an 8.40% bond will pay out Rs. 8.40 for every Rs. 100 face value. But hte Rs. 100 face value can trade at Rs. 90, which means you get Rs. 8.40 per year for Rs. 90 investment, for a current yield of 9.33%)

So Deepak, in a current high interest rate regime, why should G-bonds trade at a discounted rate to its face value? Shouldn’t the market value its price higher?

Mehul, no, the G-bond coupon for the 10 year is 8.79% – so a yield of 9% on it means that it trades for less than face value.

Thanks deepak!. Informative as usual!. But where do we see it going from here?. With inflation not softening soon enough, we might be heading towards a high-inflation/int.rates, low growth scenario!

I think rates will go up. They will stay put (not decrease) for a few months and then will hve to raise again. Of course if Europe collapses, all this analysis is bunk, everyone will cut rates around the world.

G-Sec and SDL are quoted and traded with price and semi-annual yield. Even the CCIL data you have linked shows closing yield of 9.05% for 11th Nov.

Further, the 10y yield they are mentioning is for the 7.80% GS 2021 bond which is going out of favour since the new 10y G-Sec, the 8.79% GS 2021 is now the most liquid G-Sec (closed at 8.94% semi-annual yield on 11th).

Bond-wise trade details available here :

http://www.ccilindia.com/OMHome.aspx

The yield is annualized – it’s not for the half year and

~~it is NOT the semi-annual yield.~~*Turns out it is – I thought “semi annual” meant the rate for six months, see further comment for more details.The phrase “semi annual yield” is confusing; the coupon payments are once in six months, so they are called a semi annual payment, but the yield is always annualized. The closing yield is 9.08% for the benchmark according to CCIL’s newsletter but in practice it seems to be trading shy of 9% for the most liquid bond.

Yes, the 2021 8.79% is going to be the new benchmark soon so there’s a price discrepancy (I think CCIL averages for hte 10y yield) temporarily, but it’s also quoting at 8.97%. Still the highest we have seen since 2008…

I am afraid you are a bit mistaken friend.

You can cross-check by computing the “yield” by simulating the cash flows (roughly coupon/2) for coupon dates and using the XIRR() function in Excel. For e.g. on the issue date, for the new bond 8.79% GS 2021 at price of 100.00 the yield worked out to about 8.98%, which is basically the annualised yield for 8.79% semi. Even today, the Last Traded Yield for the new bond is 8.96% semi, meaning the annualised yield is 9.16%.

In contrast, corporate bonds are quoted and traded based on their annualised yield always. Even while computing the spread between say a 10y AAA corporate bond (trading at 9.83% annualised today) and the 10y G-sec, the market uses the annualised yield for G-sec. So the spread works out to 67bps (=9.83% minus 9.16%)

Thanks for the detailed comment. I did, and I did get 8.98% for the 10 year bond through XIRR! I didn’t know this, but then I had thought you meant that the yield was semi in the sense that we have to multiply it by 2 🙂

For calculations: XIRR simply calculates an annualized compounded rate, while YIELD uses the bond payment frequency and multiplies the result by 2 – so the difference is in that you can’t multiply by just 2 in a compounding scenario (i.e. Rs. 4 every half year is not equal to just Rs. 8 per full year – since the Rs. 4 is reinvested (at the same yield) to give another piece of interest and technically add up to Rs. 8.16 per year and so on, which exaggerates over longer periods) XIRR also uses actual number of days between the coupon payments, so if you shift the starting date to a different month you’ll see marginally different returns on the same cash flow.

Corp bonds I think have a single coupon per year, so their YIELD should coincide (there is a sensitivity based error in the corresponding XIRR calc which will make it marginally different, since it uses iterations – but in practice they are absolutely the same)

Comparison wise the Annualized rate makes more sense to use, I agree; this is quite useful in the context of comparing fixed income returns. For example the annualized rate of a fixed deposit, compounded every three months, will be dramatically different from the coupon over a longer period. This gives me some ideas, thanks again!