Government bonds surge on talk of joining Indices

Subject : Economy

Section: Capital market

Context: G-Secs rally on reports of India joining JP Morgan’s emerging market bond index.

Key Points:

Government Securities (G-Secs) rallied on Friday on reports that India is tipped to join JP Morgan’s widely tracked emerging-market bond index.
JPMorgan is sounding out big investors on adding India to its widely tracked emerging-market bond index, setting the stage for tens of billions of dollars of inflows as the country’s domestic market opens up to foreign capital.
The price of the benchmark 10-year G-Sec (coupon rate: 6.54 per cent) jumped almost 50 paise to close at ₹95.43 (previous close: ₹94.935).
Yield of this paper declined sharply by about 8 basis points to close at 7.2173 per cent (7.2929 per cent). This paper is the most traded in the G-Sec market.
Note: Bond prices and yields are inversely co-related and move in opposite directions.

Emerging markets bond index (EMBI)

The emerging markets bond index (EMBI) tracks the performance of emerging market bonds and was first published by investment bank JP Morgan.
Emerging market bonds are debt instruments issued by developing countries, which tend to carry higher yields than government or corporate bonds of developed countries.
Emerging markets bond indexes are used as benchmarks for bond performance in emerging markets.
Emerging market debt or bonds are considered sovereign debt. These government bonds are typically issued in foreign currencies, either in US dollars, euros, or Japanese yen.
Because of the increased economic and political risk present in these countries, the credit rating on emerging market bonds tend to be lower than that on developed market bonds. Due to the perceived higher risk of investing in these assets. Alternately the sovereign bonds have higher yields for investors than that of more stable bonds in developed countries.
The index is weighted on the basis of the market capitalization of government bonds, but it is the sub-index with the greatest liquidity requirements, so some markets are excluded.
When one puts money in an index fund, that cash is then used to invest in all the companies that make up the particular index, which gives you a more diverse portfolio than if you were buying individual stocks.