The prices at the Exchange is around 106 .
The issue from Government is 111.
Why should I buy at such a premium ? What is the objective here ?
The G-Sec in the secondary market may be trading cheaper because of market demand, interest rate changes, or lower liquidity.
As far as I know, this is a primary issue, so the price is set at ₹111. Some investors might still opt for it at this price because they don’t have access to the secondary market. Also, in the secondary market, the required quantity may not always be available.
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Just one correction, the price is the tentative price derived from the current yield of similar duration bonds. However the actual price will be decided by the auction that will take place this Friday
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Hi @Rahul_Roy , The price difference between the G-Sec primary market (â‚ą111) and secondary market (â‚ą106) is normal and expected. When you place a bid in the primary market, the exchange temporarily blocks funds at the tentative price, but the actual price will be determined at the RBI auction held on every Friday.
Any excess amount will be reversed back to your ledger after the auction. This price of G-sec bid is calculated based on the current yields of bonds with similar durations. The main reason to invest in G-Sec bonds is to earn the yield on G-sec investments.
Secondary market prices are typically lower due to liquidity constraints - fewer buyers and sellers result in different pricing dynamics. Secondary market pricing fluctuates based on market participants, while primary market gives you direct access to purchase G-sec securities in the auction market even if you need larger quantities that might not be readily available in the secondary market.
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Which brings me to very vital question , I would have created a separate thread for it. Given the condition of the liquidity of the Gsec in the secondary market - extremely illequid, where do I actually sell these bonds ?
At this point it seems like I can buy the bonds from Primary Market but cannot sell there. Buy it from Secondary market, but selling would be painful coz of limited liquidity. What are my options here to sell these bonds ?
Hi @Rahul_Roy , When a government security has low or no liquidity, you can only sell it if there are buyers interested in purchasing it. You can check the market depth to see how many buyers and sellers are active for that particular security.
If the security is too illiquid (meaning very few or no buyers are available), you might have no choice but to hold onto it until it matures. At maturity, you’ll receive the principal amount.
Investment in bonds are like fixed deposits, you invest, to lock-in the interest rate, with the intention to hold till maturity.
The longer the time to maturity, the more chances of it being illiquid.
So, it’s advisable to invest directly in G-secs, if your time horizon matches with the maturity period of these bonds.(i.e., HTM)
If you are looking for liquidity and easy exit, it is better to invest in G-secs through Gilt funds.
Here is the issue with gsec auction process. Some bonds are of 15-20year duration and I dont even know at which price it will be auctioned. Because the ultimate yield and profit depends only on the price at which you purchased the bonds. Seems highly risky for a 15 year investment which in all likelihood you wont even be able to sell in between the time period without incurring a loss.
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I think the assumption here is that the “professionals” know best and hence the auction will determine a price such that the ytm is close to the prevalent yields. And in any case, retailers with small investment amounts can always find liquidity in the secondary markets and decide for themselves.
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Gilt Etf offers some sort of liquidity . I am new to gilt fund so not sure how much order flow it can sustain . Here are few gilt funds etf , You can easily check the liquidity from the kite.
The G-Sec auction process for regular investors is explained below. Prices, yields, and liquidity can fluctuate significantly. Bonds with maturities between 15-20 years often have very low liquidity in the secondary market. This uncertainty creates risks where investors may be unable to sell their holdings or exit their positions until maturity or unless trading volumes in the instrument increase substantially.
How auction works
The government sells bonds through auctions managed by the RBI. First, the government announces the bond quantity and maturity period it wants to issue. Then, investors including banks, mutual funds, and other institutions submit their bids, specifying how much they want to buy and at what yield they’re willing to accept. The RBI collects all these bids and arranges them from lowest to highest yield, then allocates bonds starting with the lowest yield bids until all bonds are sold.
The final price that all successful bidders pay is determined by the auction results and reflects current market demand and interest rates. This competitive bidding process ensures that the government gets the best possible rates while allowing market forces to determine fair pricing.
Buying as a regular investor
You can buy these bonds through Kite based on the issuance of the Gsec bonds as well as you can buy it directly from the RBI’s Retail Direct platform or in the secondary market. However, selling the G-sec bonds in the secondary market purely depends upon the availabilty of buyers in the market for that particular instrument.
The funds like (GILT5YBEES and GSEC5IETF from your screenshot) buy a mix of government bonds. You can trade them in the secondary market via Kite. Further, in order to identify the liquidity of these ETF’s you can refer to the market depth of the instrument, which provides a clearer picture of instrument liquidity in the secondary market. Click here to know more about market depth.
What are the returns on Government Securities
The returns are dependent on when the securities are bought and sold. If you hold bonds until they mature, you’ll get returns close to the yeild at which the securities were issued to you (fixed returns). However, if you sell early, you may face the risk of prices going up or down based on interest rate changes.
Government bonds are very safe from default, but their prices can still go up and down if interest rates change. This only matters if you sell before maturity.
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