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Informist, Thursday, Jun. 5, 2025

By Aaryan Khanna

MUMBAI – A surge in interest and secondary market trade in zero-coupon bonds has inflated widely tracked activity data in the government bond market to "misleading" levels, according to bond traders. Data from the Clearing Corp. of India shows that sales by primary dealers and purchases from a category that includes life insurance firms have swelled over the past month. This is not so much a reflection of trading calls as much as of Separate Trading of Registered Interest and Principal of Securities boosting the notional volumes on either side, dealers said.

Stripping is the process of converting periodic coupon payments of an existing government security into tradable zero-coupon securities, which will usually trade in the market at a discount and are redeemed at face value. Primary dealers act as market makers in the instruments, stripping a bond and selling to end-investors for the latter's asset liability management. Clearing Corp. of India shows that since the end of April, primary dealers have sold over INR 600 billion of government bonds in the secondary market, while the 'others' segment – which includes insurance companies, provident funds and the Reserve Bank of India - has bought over INR 425 billion. 

"The volumes are being double-counted, even more than double, because of the STRIPS demand from insurers," a dealer at a primary dealership said. "This is increasing the levels of selling that you think PDs (primary dealers) are also doing, whereas most of it is just routine activity such as clearing out auction stock."

Life insurance premium incomes are typically sluggish in the first quarter of the financial year starting April and cash flows have doubly slowed over the past few months due to regulatory changes. This has made these investors, with long-term liabilities, picky about buying underperforming bonds maturing in over 30 years. Instead, they are strategically buying discounted long-term coupons and principal payments for tenures best matching their needs.

Clearing Corp. of India data shows STRIPS with a face value of INR 120 billion were traded in April, with the face value of coupons traded nearly four times the stripped principal bond. Traders estimate that activity quadrupled in May, compiled data for which is not yet available. Anecdotally, STRIPS worth over INR 200 billion were traded in the last week of May alone, dealers said.

"Buying stripped bonds of above 10-15 years suits my portfolio, because I don't want reinvestment risks for the shorter-tenure coupons. A primary dealer acts as an intermediary to sell that to banks or mutual funds," a fund manager at a life insurance company said. "But because the nominal amounts of coupon and principal payments are all counted in the trades of the stripped bonds, the buys on my end could end up more than double the principal amount alone, which would be the one calculated if the bond wasn't stripped."

The distortion in market activity has surprised some traders, who have noted repeated purchase numbers from the 'others' segment as odd due to outright demand for long-term bonds. Since the RBI hasn't bought gilts in the secondary market, traders attributed the volumes to stripped securities and seasonal buys at the end of May by Deposit Insurance and Credit Guarantee Corp. 'Others' have pipped state-owned banks to be the largest secondary market buyers of gilts in FY26, to date. 

On the other hand, primary dealers are the top net sellers in the current financial year. Being by far the largest bidders at weekly central government auctions, the sales reflect their activity as market makers in distributing auction stock, dealers said.

To be sure, primary dealerships have also booked profits on their trading portfolios heading into the outcome of the Monetary Policy Committee's meeting, due Friday, following the decline in the benchmark 10-year government bond yield by over 30 basis points since March-end amid rate cuts. The rate-setting panel is expected to cut the repo rate by 25 bps Friday for the third straight meeting, which is largely reflected in bond prices already, dealers said.

"Positioning has also lightened up across the market," a trading head at another primary dealership said. "Bonds have rallied a lot, both in the short-end and belly segment where primary dealers would be active. So people are waiting for the MPC decision to see what to do next."  End

Reported by Aaryan Khanna

Edited by Deepshikha Bhardwaj

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