With the Reserve Bank of India (RBI) set to auction the new benchmark 10-year bonds worth R8,000 crore on Friday, the yield on the security is expected to hit levels close to 7.60% going by levels prevailing in the ‘when issued’ market.
In the ‘when issued’ market — a pre-primary market indicative of a conditional transaction in a security authorised for issuance but not as yet actually issued — the security was trading at 7.58%.
The new benchmark security worth R8,000 crore has maturity in 2026 and will be auctioned on Friday as part of the overall R14,000-crore auctions.
A new 10-year bond usually witnesses considerable demand from market participants when introduced since it acts as the benchmark for many debt instruments and eventually becomes a highly liquid instrument.
However, some market participants believe the demand may not be as large as usual. Ajay Manglunia, executive vice-president at Edelweiss Securities, does not anticipate the same aggression in bidding for the new 10-year benchmark bonds as is generally seen. “Since the ‘when issued’ market is showing the yield at 7.58%, we could expect the final cut-off to come in between 7.55% to 7.60%. I would say it would be more leaning towards 7.60%, considering the market conditions that we are in at the moment,” Manglunia indicated.
Along with the new ten-year bonds, three other securities —7.68%, 2023 bonds, 7.73%, 2034 bonds, and 7.72%, 2055 bonds — are also set to be auctioned with the total amount being R14,000 crore.
Vijay Sharma, senior executive vice-president at PNB Gilts, believes the cut-off yield should come close to 7.60%.
“It is true that the market conditions are not bullish right now, but R8,000 crore is a small amount to see the auction smoothly sail through,” Sharma said.
On Thursday, the RBI conducted the underwriting auctions for four different government securities during which cut-off rates for underwriting commission for primary dealers (PDs) was set.
The current benchmark bond—7.72% yielding bonds set to mature in 2025— was issued in May last year and has an outstanding of Rs86,000 crore in the system.
Market participants say the central bank mostly tries to limit the issuance of a particular security to a maximum of R90,000 crore, beyond which the same security is not re-issued.
On Thursday, the current benchmark yield closed flat at 7.74%.