The yield on the 10-year benchmark bond rose sharply on Tuesday to touch 8.94% from 8.88% on Monday following the government’s announcement to introduce a new benchmark paper. Typically, volumes in the exisiting benchmark paper turn illiquid when a new paper is introduced in the market. The government through a notification on Monday said the Reserve Bank of India (RBI) will auction a new 10-year paper for R6,000 crore on November 4.
Market experts say the introduction of a new benchmark bond is aimed at bringing down yields, which are currently ruling at three-year highs. ?Investors are cutting their holdings in the old benchmark paper to make space for the new, ? said J Moses Harding, head-ALCO & market research, IndusInd Bank. ? The old paper, typically, trades at a 10-15 basis points differential to the new benchmark as the liquidity starts thinning, ? he added.
The new 10-year paper, to be auctioned on Friday, closed at 8.78% levels on Tuesday in what is called ‘when-issued’ trading, where participants try to get an indication of the cut-off yields. ‘When Issued’, which stands for ‘when as and if issued’, indicates a conditional transaction in a security authorised for issuance, but not actually issued.
K Eshwar, DGM-treasury, Central Bank of India, said: ? The government has announced the new benchmark so that thr liquidity goes away from the current benchmark.? He further said the levels in ?when-issued ? trading are a good indicator to gauge where the new10-year paper will trade. The government has lined up an auction for R13,000 crore on Friday, where in addition to the 10-year paper, it will also auction 6-year and 16-year paper.
The yields on the benchmark treasury paper have shot up over 60 basis points from September 28, 2011 level, a day before the government announced R52,900 crore of additional borrowing for the second half of 2011-12. NS Venkatesh, treasurer, IDBI Bank, said: ?The sentiment in the bond market continues to remain bearish and the yields won’t come off from current levels unless RBI announces open-market operations .?