RBI Looks to Manage Redemption Pressure with 14-year Issue
Paper likely to find favour with investors as difference with benchmark is 4-7 bps
For the first time this year, the Reserve Bank of India has introduced a new 14-year security in its weekly government bond sale due on Friday as it tries to reduce future redemption pressure after sizeable issues.
The yield for the paper maturing in 2027-28 is trading at 8.74% in the When Issued (WI) market – an RBI platform for price discovery without settlement – compared with 8.70%, the closing level on Wednesday in the 10-year benchmark. The spread, or gap, normally remains at about 20-30 basis points. A basis point is 0.01%.
“This paper (14-year) will find favour from investors as demonstrated by the When Issued market, which shows only 4-7 bps yield difference with the benchmark security,” said Nirakar Pradhan, chief investment officer at Future Generali India Life Insurance. “The spread (contraction) alone suggests the rising demand. Due to its likely liquid nature, investors would buy them.”
The central bank will sell the new bond for .` 7,000 crore in the auction due on May 30 (Friday). Under normal circumstances, it will put the security on the block every alternative weekly auction.
The 10-year benchmark government bond too is due for replacement, but dealers expect it to happen only by June-end or July as issues have reached about .` 62,000 crore. As a thumb rule, the Reserve Bank issues a new bond with a different maturity when the incumbent issues cross .` 70,000-80,000 crore. “Market is excited to have a new paper to trade for the first time in 2014-15,” said Amit Tripathi, chief investment officer - fixed income investments, Reliance Mutual Fund. “More participants are likely to trade in this security as issuances rise in coming auctions, making it liquid.” Currently, the government bonds maturing in February, August and September, 2027, are significantly higher. On behalf of the government, RBI has sold bonds carrying 8.24% coupon worth .` 93,388 crore while it is .` 73,427 crore for bonds with 8.26%. The central bank has issued Rs 89,252 crore for 8.28% notes. All those bonds were issued in 2007. Cumulatively, the government will face .` 2,56,067 crore bond redemptions in 2027 and .` 2,71,068 crore in 2027-28. Gradually, all of them will turn off-the-run or illiquidity securities, dealers said. Since Tuesday, total daily volume has been hovering around 50-80 crore in WI market for the new security compared with 90100 crore each in the existing securities maturing in 2027. In WI, trading settlement of trades happens only two days after the formal issuance of the paper. This is due on June 2 in this case. “So far, investment options are not diverse…thanks to limited issuances. Due to our monthly premium inflows that keep coming, we find central and state government securities the safest bet to invest. If there's a new long-term paper in the market, we would take interest in it,” said a senior official from a large insurance house. “People will trade on the new security after it gets included in the next few auctions, which will help retain the critical mass,” said NS Venkatesh, executive director, IDBI Bank.