Coming soon: Govt security with 50-year maturity. Should you invest?

50 Year G-Sec

Soon Indian investors will have a new investment option – government security with a term of 50 years. Reserve Bank of India announced the issue of this new security while notifying the calendar for issuance of government dated securities for the second half of the fiscal year 2023-24 (October 01, 2023 to March 31, 2024) in consultation with the Government of India.

What is on offer?

So far, the Government of India has been issuing bonds with maturity of up to 40 years. For the first time, a bond with a maturity of 50 years will be issued. The security is scheduled to be auctioned for Rs 10,000 crore in the week of October 30 – November 3, 2023. The indicative yield will be announced later. Two more auctions of 50-year tenure bonds will also be announced at later dates for the second half of the FY2024.

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Why a new bond?

Long term government bonds are bought by institutional investors such as the Employees Provident Fund Organisation (EPFO), insurance companies, pension funds and even charitable trusts. There is a demand for these bonds, given the regulatory requirement for many of these institutional investors to invest the money received from their clients. Many of these have long-term commitments to their clients in the form of pensions payable or rate guaranteed products and hence they want to lock in yields by using long-term government securities.

Government also finds it convenient to issue long term papers as it gets money for the long term and also reduces administrative hassles of issuing new government securities to fund the maturity of existing government securities.

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Vikram Dalal, Founder and Managing Director, Synergee Capital Services says, “Issuance of such long-dated government securities and acceptance by the investing community indicates growing confidence in the economy of a country. At a time when Indian government securities are being considered for inclusion in more global debt indices, this should augur well as investors get one more maturity bucket on the yield curve.”

On September 22, it was announced that Indian government bonds will be a part of JP Morgan Government Bond Index-Emerging Markets (GBI-EM) global index suite from June 2024.

Is it attractive?

Since government securities carry no credit risk, they are preferred by investors with a conservative mindset. Though the actual yield at which the bond will be issued will be known after the auction goes through, the experts expect limited appeal for the 50-year term government security for investors if we exclude institutional investors like insurance companies.

Deepak Panjwani, Head-Debt Market, GEPL Capital says, “The banks and other financial institutions may not be that keen on 50-year paper as the current spread between 10 and 40 Years G-sec is 17 basis points and all the longer dated papers, be it 30, 35 and 40 years, are trading in the range of 7.34 to 7.35 percent.” In other words, there’s not much difference between yields offered by a 30-year security and a 40-year security. The interest rate cycle is almost peaked and over a period of time we may see reversal in interest rates. “But the point is if 30 years maturity and 50 years maturity G-sec are almost at same yields then why should one increase the duration by opting for longer maturity paper,” he asks. He expects the 50 years bond getting issued in the range of 7.35 to 7.40 percent.

Should you invest?

Some retail investors may find the current yield attractive after seeing far lower yields post the Covid-19 shock in CY2020 and resultant rate cuts by RBI. A few savvy investors banking on a fall in bond yields next year may want to buy long term government bonds with a view to pocket some capital gains by selling the bonds next year. But this may not be as easy as it sounds. Though it is easy to buy a government security in the auction after the introduction of RBI Retail Direct, selling the same in the secondary market can be a challenge, if you are holding small quantities.

Panjwani expects thin liquidity in these bonds as most of the supply will be picked by insurers for warehousing purposes and these institutions seldom trade in these bonds.

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He is not alone. Joydeep Sen, Corporate Trainer- Financial Markets says, “Investors should be watchful of the liquidity in the secondary market while investing in long-term government securities. For a small investor, it may be difficult to sell a government security at a fair price in secondary market.” He advises investors to consider investing in government securities if they are willing to hold on to the government securities till maturity and keen on an assured return.

Most of the individual investors may not have a 50-year view on their investments. Dalal expects very few individual investors looking at these long-term government papers. “Family Trusts keen on providing for specific needs, say maintenance of a special child, may want to allocate some money to such long-term government securities,” he adds.