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Costly Money: Firms may pay more as govt borrows at 6.5%

Of the three securities, the bonds maturing in 2022 received bids worth over six times the notified amount of Rs 3,000 crore.

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Banks are now the main investors in the bond markets given mutual funds are faced with redemptions and insurers may see premium inflows slowing.
Banks are now the main investors in the bond markets given mutual funds are faced with redemptions and insurers may see premium inflows slowing.

The government on Thursday paid a high 6.5299% to mop up 10-year money in a sign companies may need to fork out more for their borrowings. The rate was higher than the yield on the benchmark which closed the day’s session at 6.49%, five basis points higher than Wednesday’s close and an over two-month high. The rising risk-free rate threatens to drive up borrowing costs for companies many of whom are already finding it hard to borrow at affordable rates.

Investors in the bond markets have been nervous as they anticipate the government’s borrowings for 2020-21 will be higher than planned given it might announce a fiscal stimulus to help fight the slowdown caused by the Covid-19 pandemic. The yield on the benchmark has jumped some 35 basis points in four sessions to Thursday. Banks are now the main investors in the bond markets given mutual funds are faced with redemptions and insurers may see premium inflows slowing.

Ananth Narayan, professor-finance at SPJIMR, told FE the combined deficit for FY21 would be far higher than budgeted and that this fear explained the rising yields. “Both the SDL and G-sec auctions this week suffered from this excess supply in a market that has been operationally constricted quite severely by the Covid-19 situation. Eventually, the RBI will have to come in, buy bonds, and bridge the gap between supply and demand,” Narayan said.

Thursday also saw banks borrowing Rs 25,000 crore via three-year targeted long-term repo operations (TLTRO); the funds, which need to be used to buy corporate paper, are raised at close to the repo rate of 4.40%.

Siddharth Shah, head, treasury at STCI Primary Dealer, said the auction had sailed through given the extent of fiscal worries and the large size of Rs 10,000 crore for the 10-year paper. “The 10-year bond was expected to see support at 6.50% unless some negative news hits the market. The two uncertainties right now are how much further stimulus will the government announce and whether the RBI will absorb any of the potential additional borrowing by the government,” Shah said.

Of the three securities, the bonds maturing in 2022 received bids worth over six times the notified amount of Rs 3,000 crore. The cut-off yield for the paper stood at 5.09%. The 40-year bonds maturing in 2060 as well as the 10-year benchmark bonds received bids worth more than twice their notified amounts with their respective cut-off yields at 7.19% and 6.5299%.The RBI said the greenshoe option was exercised in the paper maturing in 2022 where a further Rs 2,000 crore was accepted over and above the notified amount of Rs 3,000 crore. For the bonds maturing in 2060, only Rs 4,000 crore was accepted against the notified amount of Rs 6,000 crore.

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