Yields on 5 largest state bond issues fall 122 basis points

By: | Published: September 29, 2016 6:15 AM

At a time when yields on government securities have fallen to seven-year lows, yields on the five largest bond issues by states this month have fallen by as much as 122 basis points in the last one year, data on the Reserve Bank of India website revealed.

At a time when yields on government securities have fallen to seven-year lows, yields on the five largest bond issues by states this month have fallen by as much as 122 basis points in the last one year, data on the Reserve Bank of India website revealed.

The largest bond issue by an Indian state this month was Maharashtra’s R2,500 crore issue. The cut-off yield on the issue came in at 7.16%, exactly 100 bps lower than the cut-off yield on Maharashtra’s R1,500 crore issue in September last year.

Issues by other states also saw a similar drop in yields; the cut-off for the issues by West Bengal, Haryana, Uttar Pradesh and Madhya Pradesh were all 98-100 bps lower than in the corresponding month a year ago. The yield on Gujarat’s issue dropped 122 bps y-o-y to as low as 6.93% this month.

Typically, state development loans are priced 40-60 bps higher than the prevalent 10-year benchmark. However, at 6.93%, the yield on Gujarat’s bond issue was only 15 bps higher than the yield on the new 10-year benchmark; the benchmark yield closed at a seven-year low of 6.78% on Wednesday.

Market participants say that much of the investment in state development loans is due to surplus liquidity in the system.

“If you see the last one year, yields on government securities have also dropped. This is a function of liquidity in the system. When credit offtake is extremely low and there is surplus liquidity, investors park funds in government bonds and SDLs are very similar. Liquidity in SDLs is also good, which make them safe instruments,” said Karthik Srinivasan, senior vice-president at credit rating agency ICRA.

Banks, insurance companies and mutual funds, which are the largest investors in state development loans, have bought a lot of state bonds of late and sources say that it is also because of growing expectations of a rate cut from the RBI.

“Expectations of a rate cut are definitely building up. The market has factored in 25 bps by March 2017 and if the RBI cuts sooner, then there may be room for more,” Ganti Murthy, head of fixed income at IDBI Mutual Fund, told FE. “If we see a larger rate cut, holding a 6.9%-7% paper would make a lot of sense.”

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