Reserve Bank to auction new 10-year bond on Friday

Sentiments in the bond market improved on Tuesday with the Reserve Bank of India (RBI) announcing the auction of a new 10-year bond on Friday.

The new 10-year bond will be auctioned for a notified amount of ~9,000 crore on Friday. In the when issued market, the bond was seen last trading at 7.70 per cent on Tuesday. In the when issued market those bonds are traded when the paper is authorised, but not yet issued. The new bond will eventually become the new 10-year benchmark bond.The total bond auction to be held on Friday is for a notified amount of ~16,000 crore including the new 10-year bond.

“The coupon rate on the new 10-year bond may come in the range of 7.65 to 7.70 per cent. If positive sentiments continue, the cut-off will come below 7.70 per cent. This will also have some positive impact on the corporate bond market,” said Badrish Kulhalli, head of fixed income at HDFC Life.

The yield on the existing 10-year benchmark bond ended at 7.86 per cent compared with the previous close of 7.90 per cent.

“The announcement of a new 10-year bond resulted in positive sentiments due to which bond yields dropped today (Tuesday). We do not expect any significant change in the yield level of the old benchmark from here,” R Sivakumar, head of fixed income at Axis Mutual Funds, said.

With the new 10-year bond, the spread or the difference in yields between the 10-year government bond and corporate bonds of similar maturity tenure are set to widen. The spread between the 10-year government bond and the 10-year “AAA” rated public sector undertaking corporate bond is currently 62 basis points.

“State development loans will get reprised as they are subject to mark-to-market over the 10-year G-sec. State development loans will rally to that extent. The spread between corporate bonds and G-sec may initially widen but eventually it will get adjusted,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities.