Monday, August 2, 2010

Bonds and Bonding

Have you ever tried to find out what similarities do the financial instruments have with our day-to-day activities? Some might be wondering for the logic behind this question whereas some might say that it’s too obvious as the instruments are meant to take care of our day-to-day financial needs depending upon our incomes and risk taking capabilities. Let me put a more specific question; what are the similarities between Fixed Income instruments and relationships in real life? Before you start guessing let me simplify the task by defining the two terms. By fixed income instruments, I mean those financial instruments that help you earn low but fixed returns on your investments thereby reducing your risk. The most well known example is bond. On the other hand by relationships, I mean those existing between a boy and a girl or a man and a woman. I am counting out those arising out of family ties, friendships or those existing between same sexes. In better words let’s limit ourselves to those relations that might culminate into marriages.

Any fin guy would tell you that fixed income is one of the most specific areas of finance. So, if you don’t aim to be an I-banker and thus intend to turn the page over, I would still request you to join me in this exploration.

First of all, why the need for fixed income market exists? The answer is to find an alternative for the volatile equity markets. Aren’t relationships too aimed at helping you counter the vagaries of loneliness? They help in sharing happiness as well as sorrows thereby mitigating the upheavals in life thus mirroring the impact of debt markets on your returns. Let’s us now focus on the characteristics of a debt instrument say bond. The longer the maturity of the bond the more risks it entails so greater are our expectations in terms of yields. On the same lines, a long-term relationship is much more demanding. If you still doubt me, ask any husband who has forgot his anniversary or wife’s birthday. On the other hand a short duration instrument like T-bill finds many takers even at low yields as in short term relationships that prosper because of low level of commitments.

While looking for an analogy between source of bonds and motive behind relationships, on the basis of issuer, we can broadly classify bonds into two types; corporate and government with the offerings being named corporate bonds and G-Sec (government securities) respectively. Buying a G-Sec is like having a relationship with a guy or a girl whom you love as a person. Nothing else matters. The emotional security is valued more even if it comes at the cost of economic benefits akin to sovereign bonds where the government guarantee outscores low returns. On the other hand having a corporate bond in your portfolio is a sign that one is hoping to earn a little more than a normal debt instrument and so he is guided by the fundamentals of the issuing firm. At the same time, there are occasions when you find a man or a woman falling for a partner because of features like his/her attractive looks or his/her bank balance. Though one benefits materialistically but they result in frequent break-ups due to incompatibilities as is the case with corporate bonds which have much higher rate of defaults.

Some of you who have a Facebook (social networking site) account would have come across the option of “it’s complicated” while filling your relationship status. In such complex relationships one isn’t sure of the future prospects of the companionship. In short, they are indecisive and thus face a lot of anxiety. Similar is the case with complex instruments in debt market that enhance the risk attached to your investments as outcomes are very unpredictable. The advent of technology has impacted the markets as well as relationships. On one side virtual platforms like social networking sites, chat rooms etc. facilitate real life relationships and on the other hand we have dematerialised securities being traded on electronic avatars like NDS-OM (negotiated dealing systems-order matching) which is an electronic, screen based, anonymous, order driven trading system for dealing in G-Secs. Though NDS-OM brings transparency to the trading system but same can’t be said of the online relationships.

How about money markets where banks trade with compatible lenders or borrowers in repo and call market to meet their short duration financing needs? Aren’t they desperate to meet the CRR (credit reserve ratio) and SLR (statuary liquidity ratio) requirements? Can we find an analogy in the money markets for the discotheque where guys and girls are desperate to let their hair down after a tiring day with a few dance rounds sometimes resulting in a few casual or serious relationships? I think we can. With DJ controlling the Disco through his set, it’s the RBI who makes the market participants dance to its tune in the money markets.

And if you thought that only the fixed income market allows you to diversify through instruments of varying maturity and returns, think again. The Casanovas and the playboys have mastered the art long ago by romancing multiple beauties at a given time.

By the way, aren’t relationships also known as bonds?


  1. Interesting read. Am sure many of the 'non fin' guys would now have got a better picture of fixed income market.

  2. Thanks Prashnath. I think that we all need to know about fixed income market(FIM) at least from an investor point of view as there is a debt component in many our investments like MF, Insurance etc.So, my main motive behind writing this blog was to generate curiosity about FIM.

  3. Hello. Im in class 11 and for some school work i need to know about deregulation of oil prices. I read your post about in feb. It made stuff pretty clear. I want to ask though, what is the current situation? Also, what is it like for a consumer. please elaborate. Thanks :)

  4. Priyanka you might find this link informative.

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