Ahead of the issuance of its borrowing calendar
for the next financial year, central government representatives met bond dealers
to gauge the market’s mood on the Rs 6 trillion loan plan.
The meeting was customary but assumes significance as 10-year bond yields
have risen 100 basis points in the two quarters since October, even as the Reserve Bank kept its policy rates unchanged.
According to sources, the market participants proposed the government to bring down the duration of the bonds it would issue. One way is to issue more of floating rate ones, it was suggested. If not possible, considering the issuer gets exposed to adverse rate movement with the coupon getting reset every six months, more bonds could be issued that mature below 10 years or at 15 years and above.
“The 10-14 years is a problem bucket. For 15 years and above, insurance firms
are ready buyers and any maturity below 10 years has big demand,” said a senior dealer. Of late, bulk of issuance has been through bonds maturing between 10 to 14 years.
The demand for allowing more bonds below 10 years is not new but the government has not acted on this. For, it puts enormous redemption pressure too soon for the government, said another trader.
To compensate, the dealers have requested issuing of more bonds above 15 years.
Another issue discussed was to increase the permissible investment limit for foreign portfolio investors
(FPIs) in bonds. Currently, FPIs
are allowed to invest up to 5 per cent of those outstanding and have nearly exhausted the limit. At a time banks are not in a mood to invest in bonds, fearing mark-to market (revaluing at current value) losses, an increase in the FPI limit would help reduce the pressure, the bond dealers
Dhawal Dalal, chief investment officer for fixed income at Edelweiss Asset Management, has said the feedback to the government would be to increase auctions of floating bonds linked to six months or 12-month treasury bills, consider regular issuance of benchmark government bonds for three years, five years, seven years, 10 years and 15 years, and to standardise interest payment dates, to develop a fixed income derivatives market.