Government bonds are the type of debt-based investments, where money is loaned by you to the government in return for a predetermined interest rate. Governments tend to use them for raising funds that can be used on infrastructure or new projects, and the investors tend to use them for getting a set return at regular intervals. Given below are further details on government bond yield.
The way of working for government bonds
By purchasing a government bond, you end up lending a fixed amount of money for a certain time to the government. In return, you are paid back in coupons, i.e. at a particular interest level at regular intervals. Thus, the government bond yield becomes your fixed-income asset.
You will be back to the original investment after the bond expires. The maturity date is the term used to denote the day on which the original investment is back to you. Just like the differences in government bond yield, different bonds also have different dates of maturity. So, a bond can mature in a year or take thirty years.
Example: $10,000 is invested in a 10-year bond with a five percent annual coupon. Every year you will get five percent of $10,000 as interest. On the maturity date, you will get back the actual $10,000.
Different types of government bonds
Though the rules for government bond yield remain the same, different countries use different terms for government bonds. Treasury is the other name used for bonds in the US, while the UK knows government bonds as gilts. If you are looking to trade in bonds from other governments outside the UK or the US, you should research the market and know their terminology beforehand. Based on maturity, treasuries can be broadly classified into three categories:
- Treasury bills expire in less than a year
- Treasury notes reach maturity in one to ten years
- Treasury bonds expire in over ten years
Index-linked government bonds
There are government bonds that do not come with fixed coupons. The interest payments tend to move in keeping with the inflation rates for those bonds. In the US, these types of bonds are known as TIPS (treasury inflation-protected securities). You should know more about government bond yield for these bonds before investing.
Factors affecting the price of government bonds
Demand and supply
The prices of government bonds get dictated by demand and supply, just like all other financial assets. Each government sets the supply of government bonds. The government issues new bonds as per their needs. Demand for the bonds is based on whether the bonds appear to be lucrative investments as per government bond yield.
Interest rates also influence the demand for bonds and government bond yield. Demand for bonds rises as a mark of better investment when the interest rates are less than the coupon rates on the bond. Demand drops when the coupon rate of the bond is lower than the interest rate.
The maturity date of the bond
Newly-issued government bonds are priced keeping the present interest rates in sight. This means that they are usually traded near or at the par value. When the bond reaches maturity, it is a payout of the actual loan. So, the bond will go back to its par value in government bond yield at this point. The interest rate payments left before the maturity date also leave an impact on the price.
Credit ratings
Government bonds are generally seen as low-risk investments as there's less chance of the government defaulting on loan payments. However, defaults still take place, and riskier bonds generally trade at lower prices compared to a bond having the same interest rate and lower risk. Moody’s, Standard and Poor’s, and Fitch are the three credit rating agencies whose ratings offer a good way of assessing the risks of the government defaulting in ensuring government bond yield.
The government usually issues bonds through bond auctions. The bonds are bought by financial institutions or large banks at the auction. These institutions sell bonds to other banks, individual investors, or pension funds. It is important to understand the details of government bond yield before going ahead with your investment.
"Kekhawatiran ini masih bisa menekan turun aset berisiko hari ini termasuk rupiah," ucap dia.Namun, yield obligasi AS tenor 10 tahun yang kembali turun ke kisaran 1.58% dinilai dapat menahan pelemahan rupiah terhadap dolar AS.
"Dan mungkin bisa mendorong penguatan Rupiah terhadap dollar AS," ujarnya.Ia memperkirakan rupiah hari ini bergerak di antara Rp 13.670 - 13.720 per dolar AS.Artikel ini telah tayang di Katadata.co.id dengan judul "Rupiah Dibuka Menguat Meski Investor Waswas Perkembangan Virus Corona" , https://katadata.co.id/berita/2020/02/17/rupiah-dibuka-menguat-meski-investor-waswas-perkembangan-virus-coronaPenulis: Agatha Olivia VictoriaEditor: Agustiyanti
Recently, Chief Economic Advisor (CEA) of India Krishnamurthy Subramanian said that it is the right opportunity for the country to raise funds through overseas sovereign bonds at a much cheaper rate compared with those in the domestic market.
Apart from the CEA’s viewpoint, an announcement by Finance Minister Nirmala Sitharaman in her Budget 2019 speech was also that “India’s sovereign external debt to GDP is among the lowest globally at less than 5%.
Sovereign debt is a debt issued by the national government generally in a foreign currency in order to raise funds or to finance the country’s fiscal deficit or to fund development projects.
The stability of the government of the issuing country and confidence in the currency among others are some of the parameters which can be considered by an investor before buying the bonds.
Countries with high-credit-worthiness will pay less interest on such bonds whereas countries with low-credit-worthiness will pay high interest.
This is why it is being said that India is in the right zone to issue the sovereign bonds now after five years of a stable and strong government, followed by an even bigger mandate for the incumbent.
