Introductory Context
"Systematic fixed income strategy capturing yield income and capital appreciation from static yield curve roll-down across Indian G-Secs, SDLs, and Bharat Bond ETFs."
The Mechanics of Bond Carry & Yield Curve Roll-Down
In fixed income quantitative investing (formalized by Koijen, Moskowitz, Pedersen, and Vrugt, 2018), Bond Carry represents the total return an investor earns by holding a sovereign bond assuming the term structure of interest rates remains completely unchanged over the holding period.
Total bond carry consists of two distinct components:
In an upward-sloping yield curve (typical of Indian Government Securities / G-Secs), as a 10-year sovereign bond ages into an 9-year bond, its yield naturally drops from 7.15% to 7.02%, resulting in automatic capital appreciation in addition to the semi-annual coupon yield.
• The Bond Carry Rule in One Sentence
Rank the universe of sovereign bonds and liquid corporate debt by their frozen-curve total carry (yield + roll-down); establish long positions in the highest-carry maturities (steepest segments of the yield curve) and short/hedge the lowest-carry segments, maintaining overall duration neutrality.
Mathematical Formulation of Sovereign Roll-Down
Let P(t, T) be the clean price of a zero-coupon or coupon bond with maturity T at time t, and y(t, T) be its annualized yield to maturity. The expected 1-period holding return on a frozen yield curve is:
Decomposing this using Modified Duration (ModD) and the curve slope (Δy / ΔT):
- Yield Component: The pure coupon and interest accrual earned per unit time (y × Δt).
- Roll-Down Component: ModD × Δyslope. If the 5-year to 4-year curve slope is steep (e.g. 25 bps drop), a bond with modified duration of 4.2 years gains an additional 4.2 × 0.25% = +1.05% in capital appreciation purely from rolling down the static curve.
Application in Indian Markets: G-Secs, SDLs, and Bharat Bond ETFs
In India, bond carry strategies are executed across three major institutional and exchange-traded debt avenues:
Institutional primary dealers and mutual funds trade 2-year, 5-year, 7-year, 10-year, and 14-year on-the-run and off-the-run Government of India (GoI) benchmark bonds on the Reserve Bank of India's NDS-OM platform.
Retail and HNI investors execute roll-down via NSE-listed Bharat Bond ETFs (AAA PSU debt) and Nifty G-Sec Target Maturity Index Funds, capturing locked-in roll-down gains until maturity with zero active churn.
Quantitative hedge funds hedge the macro interest rate duration risk using NSE 10-Year GoI Interest Rate Futures (IRF), isolating pure curve shape alpha from parallel yield shifts.
Worked Indian Yield Curve Roll-Down Scenario
Consider a 7-Year Government of India Benchmark Bond (7.18% GS 2033) held over a 1-year horizon along an upward sloping CCIL sovereign curve:
| Bond Metric | Entry (Year 0) | Roll-Down Mark (Year 1) | Net Impact |
|---|---|---|---|
| Remaining Maturity | 7.0 Years | 6.0 Years | 1 Year Time Slide |
| Yield to Maturity (YTM) | 7.18% | 7.00% (Curve Yield at 6Y) | -18 bps Yield Slide |
| Clean Price per ₹100 Face | ₹100.00 | ₹100.86 | +₹0.86 Price Gain (+0.86%) |
| Annual Coupon Earned | - | ₹7.18 | +7.18% Coupon Yield |
| Total Realized Return | - | ₹8.04 / ₹100 | +8.04% Total Carry Return |