Treasury Markets

Need for Treasury Market No return from holding excess reserves for a bank. Treasury investments yield returns for the holding period. Treasury investments provide maximum safety as they are the Sovereign’s commitment. Treasury investments are needed to meet cash requirements of banks.

Advantages of Treasury Investments Held in dematerialized form, hence there is no requirement for safekeeping of instrument. Available in the market with different maturity durations to meet the long (30 years) as well as short term (91 days) fund and investment requirements of banks. Secondary market provides required liquidity for trading in treasury investments.

Advantages of Treasury Investments Used as collateral to borrow funds in the repo market. Simple and efficient system of settlement (delivery on payment) thereby reducing settlement risk. Statutory needs of the bank are met through holding of treasury investments.

Players in the Treasury Market Banks Investment companies Large investors Co-operative banks Regional rural banks Provident funds

Government Security Traded securities issued by the central or state government. Government’s debt obligation. Treasury bills (maturity of less than 1 year). Government bonds (dated security with maturity of more than one year). State Government’s issue of bonds (State Government Loans (SDL)).

Treasury Bills (T-Bills) Money market instruments Short term debt instruments Zero coupon bonds Issued by the Government of India Maturity durations –91 days –182 days –364 days Issued at a discount and redeemed at face value on maturity

Issue of Treasury Bills Auctioned by Reserve Bank of India. Auctions for 91 day bills every Wednesday and payments made on the following Friday. Auctions for 182 days and 364 days bills conducted on alternate Wednesdays. Notified amount for issue –91 days Rs.500 crore –182 days Rs.500 crore –364 days Rs.1000 crore

Dated Government Securities Long term securities. Carry a fixed or floating coupon payment. Issued by Reserve Bank of India through auctions. Introduction of new product types in the market. Auctions through electronic platforms termed Public Debt Office – Negotiated Dealing System (PDO – NDS).

Types of Government Securities Fixed rate bonds –coupon rates are constant throughout the maturity period Floating rate bonds –coupon amounts are re-set at pre-determined intervals Zero coupon bonds –issued at a discount and repaid at face value Capital indexed bonds –Principal amount is linked to an acceptable index of inflation

Types of Government Securities Bonds with call / put values –Bonds issued with features of options –Call option allows issuers to buyback bonds –Put option allows investors to sell bonds Special securities –Compensation for subsidies –Oil Marketing Commission –Fertilizer Corporation –Food Corporation

Types of Auctions Yield based auctions –Bids are arranged in ascending order and the cut-off yield is arrived at the yield corresponding to the notified amount of the auction Price based auctions –Government of India re-issues securities already issued earlier –Bids are arranged in descending order and the successful bidders are those who have bid at or above the cut-off price

Holding of Government Securities Physical stock Dematerialized form –Subsidiary General Ledger Account (SGL) –Gilt Account

Trading of Government Securities Over the Counter (OTC) Telephone Market Negotiated Dealing System Stock Exchanges

Important Considerations Identification of Treasury instruments Evaluation of instrument price Method of entering the Treasury market Determination of holding period –Held to maturity –Available for sale

Risks in Treasury Investments Market risk –Changes in quoted market price of the instrument due to economic and market scenarios. Liquidity risk –Inability of the investor to sell the holdings due to non availability of buyers in the market. Reinvestment risk –Cash receipt from coupons need reinvestment and the market rate may be lesser than the coupon rate.