Government security with a 50-year maturity is forthcoming. What about investing?

 Government security with a 50-year maturity is forthcoming. What about investing?

G-secs, often known as government security, carry very little to no credit risk. However, some G-secs, primarily the 10-year benchmark, are liquid. However, institutional investors, as opposed to individual investors, are more likely to purchase long-term government bonds. Here are some projections for it.

Government securities with a 50-year lifespan will soon be a new investment option for Indian investors. In conjunction with the Government of India, the Reserve Bank of India confirmed the issuance of this new security together with the calendar for the issuance of cabinet-dated securities for the second half of the fiscal year 2023–24 (October 1, 2023 to March 31, 2024).

What is provided?

The Indian government has so far only issued bonds with a maximum maturity of 40 years. For the first time ever, a bond with a 50-year maturity will be released. The security is expected to fetch Rs 10,000 crore at auction during the week of October 30–November 3, 2023. Later, the indicative yield will be disclosed. Additionally, two additional 50-year duration bond auctions will be announced at a later time for the second half of FY2024.

How come a new bond?

Institutional investors, including the Employees Provident Fund Organisation (EPFO), insurance firms, pension funds, and some charitable trusts, purchase long-term government bonds. Given the regulatory necessity for many of these institutional investors to invest funds received from their clients, there is a market for these bonds. Many of them desire to lock in yields by utilizing long-term government securities because they have long-term obligations to their clients, such as pensions payable or rate-guaranteed contracts.

The government also finds it convenient to issue long-term debt since it receives money for the long term and avoids the administrative burden of having to issue fresh government securities to cover the maturities of older debt.

"Issuance of such long-dated securities issued and acceptance by those who are investing indicates growing confidence in the economy of a country," says Vikram Dalal, chairman and managing director of Synergee Capital Services. This could bode well for investors as they gain access to another maturity bucket on the yield curve at a time when Indian government assets are being considered for inclusion in several global debt indices.

Indian government bonds will start appearing in the JP Morgan Government Bond Index-Emerging Markets (GBI-EM) global index suite in June 2024, according to a statement made on September 22.

Is it appealing?

Conservative investors favor government assets since they don't include any credit risk. If we exclude institutional investors like insurance firms, the experts predict limited attraction for the 50-year term government security for investors. The precise yield at which the bond will be issued will be revealed after the auction is complete.

"The banks and other financial organizations may not be that interested on 50-year paper," says Deepak Panjwani, Head-Debt Market at GEPL Capital, "as the present spread between 10 and 40 Years G-sec is 17 basis points and all larger dated papers, be it 30, 35, or 40 Years, are trading in the range of 7.34 to 7.35 percent." In other words, the yields offered by a 30-year security nor a 40-year security are similar. The interest rate cycle is almost at its apex, and interest rates may reverse in the future. But the question is, he says, "why should one choose longer maturity paper if the yields on G-secs with 30 and 50 years of maturities are nearly equal?" He anticipates that the 50-year bond will be issued at a rate between 7.35 and 7.40 percent.

What about investing?

After experiencing much lower rates following the Covid-19 shock in CY2020 and the ensuing RBI rate cuts, some retail investors may find the current yield to be attractive. A few shrewd investors who are betting on a decline in bond yields the following year would choose to purchase long-term government bonds with the intention of selling them for a profit the following year. However, this might not be as simple as it seems. After the implementation of RBI Retail Direct, purchasing government securities at auction is now simple, but selling them in the secondary market can be difficult if you only have a small ownership.

Since insurers will choose the majority of the supply for storage needs and since these institutions hardly ever trade in these bonds, Panjwani anticipates low liquidity in this market.

It's not just him. When investing in long-term government securities, investors should keep an eye on the secondary market's liquidity, advises Joydeep Sen, Corporate Trainer-Financial Markets. It could be challenging for a small investor to sell a government security on the secondary market for a fair price. He suggests that investors think about buying government assets if they want a guaranteed return and are prepared to retain the securities until they mature.

The majority of individual investors might not view their investments over a 50-year period. Few individual investors are likely to be interested in these long-term government papers, according to Dalal. "Family Trusts keen on providing for specific needs, say maintenance of a special child, might be interested in allocate some money to such long-term federal securities," the author continues.