Shortest ruling 10-year benchmark bond ever: Changes within three months

The high borrowing programme has upset normal rules of investing for many in the market
The government has introduced a new set of benchmark 10-year bonds, within 10 months of raising a new one, as record borrowings have made the discipline of not bunching up redemption difficult to implement.

In Friday’s auction, the government introduced the new 10-year bond, at a yield of 5.77 per cent, and raised Rs 18,000 crore from it. The security issued in May had a cut-off coupon of 5.79 per cent, and is also the most traded in the market because of its liquidity. This is the shortest ruling benchmark ever, and the government may have to increase its redemption limit later to avoid issuance of such number of securities.  

“The government typically caps total issuances in any particular security at Rs 1.2 trillion to avoid bunching up of redemptions. Given the increased weekly auction size, the 10-year bond issued in May had already reached Rs 1.04 trillion in total outstanding, due to which the government probably decided to issue a new 10-year bond so early into the fiscal year,” said B. Prasanna, head of treasury at ICICI Bank.

Typically, such benchmark setting used to happen once a year. Bond dealers say such quick benchmark setting can create some confusion in the markets on rate setting. Also, when the outstanding comes close to Rs 1.2 trillion, people may not take positions on existing bonds fearing issuances to stop. That will push up yields.

The high borrowing programme has upset normal rules of investing for many in the market. The original plan was to raise Rs 7.8 trillion for 2020-21, but subsequently the target was raised by 53.85 per cent to Rs 12 trillion. In the first half of the year, Rs 5.16 trillion has been raised, while the greenshoe option has been used to raise another about Rs 60,000 crore.

The RBI has also engaged in yields management by switching short term bonds with longer dated bonds. The May launched 10-year bond still has Rs 16,000 crore of room left on that, and that can be used to switch auctions during the rest of the year, Prasanna said.

Additionally, the 10-year security is the 9th security that would be available for foreign portfolio investors (FPI) under the fully accessible route. Therefore, this will also increase the availability of securities for foreign investors to take positions in, and boost foreign currency flow.

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