New 10-yr bond’s coupon may be highest since ’11

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SummaryThe new 10-year benchmark government bond that would be used as a reference for pricing in money and credit markets

The new 10-year benchmark government bond that would be used as a reference for pricing in money and credit markets going forward is likely to carry a coupon of 8.75-8.80% if trades in the “when-issued” market are anything to go by. RBI will sell R7,000-crore worth of the new 10-year paper along with three other bonds at the auction on Friday.

“The 10-year could see a cutoff in 8.75-8.80% range, similar to what the when-issued indicates,” said Sandeep Bagla, associate vice president at ICICI Securities Primary Dealership.

This will be the highest coupon set for the 10-year benchmark paper since 2011, even though it would be nearly 30 basis points lower than the existing 10-year benchmark 7.16%, 2023 bond yield, which closed the Thursday trading session at 9.08%.

The when-issued market is an informal market for a new security that is yet to be issued, which helps to provide a clearer indication of pricing and demand. In this market, the new 10-year bond was trading around 8.78% on Thursday.

Hitendra Dave, head of global markets at HSBC, said market participants would push for a higher coupon as the bond would then be “in the money” for a longer period and help boost treasury profits.

Government bond yields have risen sharply over the last one month as worries of an earlier than expected tapering of stimulus by the US Federal Reserve and expectations of policy rate hikes by RBI dampened buying interest and pushed yields above 9%.

Moreover, with around R15,000-crore worth of fresh supply of bonds every week through auctions, most banks are already sitting on huge bond investments, which has tempered fresh demand. The banking system’s total bond holdings under Statutory Liquidity Ratio is at near 30%, far higher than the regulatory mandate of 23%. Since April, the 10-year bond yield has risen by 100 basis points, and most investors have had to book mark-to-market losses owing to the rise in yields.

“This year, no one has made any money, even on the 10-year and the market demand is waning. So, there is doubt whether the new 10-year also would generate any money for investors,” said the head of a primary dealership. Traders said in absence of further bond purchases under OMOs by RBI, the 10-year benchmark bond yield is unlikely to fall below 9%.

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