Dated G-Secs vs. T-bills vs. SDLs: Differences and Similarities

The government bonds market is by far the largest investment securities market in the world. Specifically, the Indian government bonds market size is around $1.2 trillion or a mind-boggling Rs. 100 lakh crores.

Mainly, there are three Types of Government Bonds or securities in India:

1. Dated G-secs (or Dated Government Securities): Issued by the central government
2. T-bills (or Treasury Bills): Issued by the central government
3. SDLs (or State Development Loans): Issued by the state governments

This article will discuss each of the main types of government bonds and compare them to highlight their similarities and differences.

What are Dated G-secs or Dated Government Securities?

Dated G-secs are long-term Government Bonds issued by the central government. There are several types of Dated G-Secs available but the following are the most popular.

1. Fixed rate Dated G-secs
2. Floating rate Dated G-secs (also called FRBs = Floating Rate Bonds)
3. Sovereign Gold Bonds or SGBs
4. Inflation Indexed Bonds or IIBs
5. 7.75% Savings (Taxable) Bonds, 2018

Dated G-secs are normal interest paying bonds with a semi-annual interest payment frequency.

What are T-bills or treasury bills?

A treasury bill is a short-term (less than one year) government security issued by the central government. Treasury bills have one of three tenures: 91 days, 182 days or 364 days.

Unlike normal Bonds that pay interest, T-bills are zero coupon instruments. Simply put, T-bills don’t pay regular interest but rather pay the entire profit at maturity.

Normal interest-paying bonds are issued at face values that are round numbers (for example, Rs. 1,000). However, T-bills and other zero coupon bonds are issued at a discounted price to the face value. The investor of a zero coupon bond receives the face value at maturity.

For example, a T-bill with a face value of Rs. 1,000 may be issued at a discount price of Rs. 950. On the maturity date, the T-bill investor will get the face value of Rs. 1,000.

What are SDLs or State Development Loans?

SDLs are long-term bonds issued by individual Indian states to finance state level budget deficits. Similar to the bonds issued by the central government, SDLs also have a sovereign guarantee.

Most SDLs are issued with a 10-year tenure and have a semi-annual interest payment frequency.

Dated G-secs vs. T-bills vs. SDLs

Risks of investing in Government securities in India

There are 4 types of risks to which a government security may be exposed. Let’s define the risks and then see which government securities are exposed to them.

Credit default risk:

Credit default risk is the risk that the bond issuer (borrower of money) is unable to repay the debt obligation to the bondholders.

The stronger the financial position of the bond issuer, the lower is the credit risk and vice versa.

Interest rate risk:

Interest rates and bond prices are inversely related. Interest rate risk refers to the risk that the price of the bond may fall if the interest rate in the markets goes up.

Learn more about: Bond Yield vs Interest Rate

The longer the balance maturity (tenure) of a bond, the higher will be the impact of changing interest rate on it.

Reinvestment risk:

Reinvestment risk is the risk that investors will not be able to reinvest the interest payments/coupons received at the same interest rate as the original bond.

For example: Suppose the interest rate of your bond is 8%. When you receive the interest and want to reinvest it, you may not be able to reinvest it at 8% but rather at a lower interest rate.

Liquidity risk:

Liquidity risk is the risk that investors will not be able to liquidate/encash the bond quickly and at a fair market value.

This happens because of inadequate demand for the bond in the market.

Risk associated with all government securities: