Cooling of G-Sec yields to bring relief for states in this financial year

States can be now confident of seeing their bond issuance going through in this financial year in the light of the Centre reducing its borrowing programme and bond yields falling to reflect the sentiment.

On Tuesday, three states held back issuing their bonds worth Rs 34 billion, of the Rs 88.5 billion planned by nine states. Yields on central government bonds rose sharply that day following the comments of a Reserve Bank of India (RBI) deputy governor that lenders should not come to the apex bank for relaxations on their mark-to-market losses.

As a fallout, investors asked for steep rates on state development loans on offer. Karnataka had to pay eight per cent for its 10-year bonds, but Andhra Pradesh (Rs 9 billion), Maharashtra (Rs 15 billion), and Tamil Nadu (Rs 10 billion) refused to sell their papers, auction results showed. How much of coupon investors wanted could not be known, but it can safely be said yields were at the vicinity of what Karnataka paid for its 10-year bonds. There was demand for the papers, as the results showed bids were received well above the plan, but the coupon asked for was definitely high.

“Those states that have comfortable cash positions can afford to delay the issuance till the yields cool down. These states will come back soon. The market appetite is there for a price,” said a bond dealer, who buys state loans. 

On January 9, Tamil Nadu had paid 7.77 per cent to its investors for raising Rs 20 billion through 10-year bonds. Similarly, Andhra Pradesh had paid 7.76 per cent. Karnataka, which paid eight per cent on January 16, had paid 7.79 per cent on January 2, same as what Tamil Nadu had paid at that time. 

So, it is apparent that investors do club Karnataka and other states within the same category and yields on these bonds had increased 24-25 basis points (bps) in just a week. Comparison with the benchmark is not valid here as a new 10-year paper was introduced in between. Nevertheless, the rise in yields was not that dramatic except on Tuesday, in reaction to RBI Deputy Governor Viral Acharya’s comment. The yields have fallen after the government cut down the extra borrowing programme to Rs 200 billion, from Rs 500 billion earlier. The benchmark yields cooled about 20 bps on Wednesday as a result. 

The recent cut-off was about 63 bps above the 10-year benchmark bond. Generally, the yield differential between the two remains at 25-50 bps. The 10-year benchmark yield itself has risen more than 90 bps in the past three months, but the rise in yields in state government bonds has been lesser than that seen in central government securities, which shows that states have been rejecting higher bids and keeping their finances under check, say bond dealers. 

While states have in the recent past stepped up their issuances, raising oversupply concern of fixed income papers, the indicative calendar for the present financial year has been lower than market expectations. And this is one of the factors why states have been able to raise money relatively cheaper despite adverse movements in the benchmark yields. 

According to Icra Ratings, the indicative calendar of market borrowing released by the RBI signals a 15.4 per cent year-on-year growth in gross state development loans for the fourth quarter, but this is also a contraction of 13.2 per cent in the third quarter of FY18. 

Besides, the fundraising plan is sharply lower than the 32.9 per cent growth recorded in the first half of the present fiscal year.

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