The new 10-year benchmark bonds to be introduced during Friday’s auction are likely to see their coupon set below 6%, given that the current benchmark bonds have rallied in recent times and the market anticipates the coupon on the new paper to be lower.
PNB Gilts senior executive vice-president Vijay Sharma expects the new benchmark bonds to yield 18-20 basis points (bps) lower than the yield on the current benchmark bonds when it commences this Friday. “On Wednesday, we saw the present benchmark bonds rally due to the sharp hike in excise duty on petrol and diesel that will add more than Rs 1 lakh crore to the government’s kitty this fiscal. Based on Wednesday’s assessment, the yield on the new benchmark should be close to 5.85% unless there is a big move either ways in the current benchmark yield,” he said.
A Barclays report estimates that the central government’s revenue benefit from the additional hikes in fuel taxes could be as much as Rs 1.4 lakh crore on an annual basis. The potential of additional revenue was cheered by the bond market with the yield on the 10-year bonds closing 5 bps down at 6.028% to hit the lowest level since March 2009.
One indication that the new benchmark bonds may commence with a coupon below 6% comes from the bids seen in the ‘When Issued’ market. According to RBI, ‘When Issued’ trading takes place between the time a government security is announced for issuance and the time it is actually issued. All ‘When Issued’ transactions are on an ‘if’ basis, to be settled if and when the actual security is issued.
On Wednesday, the bonds maturing in 2030 that are proposed to be issued during Friday’s government auction saw bids as low as 5.83% in the ‘When Issued’ market. No trades involving the new benchmark paper were reported in this market on Wednesday since the offer yield stood at 5.75%. However, the bid shows that there is buying interest at such a low level.
STCI Primary Dealer’s head of treasury Siddharth Shah is also of the view that the coupon on the new 10-year G-sec will most likely get set below 6%, given that historically the new benchmark begins trading 15-20 bps lower than the yield on the current benchmark paper. “Even if you see the ‘When Issued’ market, we saw a bid as low as 5.83%.
Also, whenever the new benchmark bonds hit the market, there is renewed interest and trading activity as market participants start taking positions in the new paper. With the government selling Rs 10,000 crore worth of the new benchmark paper this auction, we expect the new bonds to see significant trading volumes once three-four auctions involving this paper are conducted,” Shah said.
Meanwhile, the Reserve Bank of India (RBI) has conducted open market operation (OMO) outright purchases in secondary market to the tune of Rs 61,075 crore during April, according to the latest data put out by the central bank through the weekly statistical supplement. Though there is no concrete proof, market participants indicate that a bulk of this OMO purchase is likely to be in treasury bills (T-Bills).