Centre launches new set of 10-year benchmark bonds
Govt may raise redemption limit later to avoid issuance of such number of securities
The Centre has introduced a new set of 10-year benchmark bonds, within 10 months of raising the earlier one. This comes amid record borrowings, which have limited the government’s ability to ensure that redemptions do not bunch up.
In Friday’s auction, the government raised ~18,000 crore by introducing new 10-year bonds at a yield of 5.77 per cent. The security issued in May had a cut-off coupon rate of 5.79 per cent, and is the most traded in the market because of its liquidity.
This has been the shortest ruling benchmark ever, and the government may have to increase its redemption limit later to avoid issuance of such number of securities. “The government typically caps total issuances in any particular security at ~1.2 trillion, to avoid the bunching up of redemptions. Given the increased weekly auction size, the 10-year bond issued in May had already reached ~1.04 trillion in total outstanding, due to which the government probably decided to issue a new 10year bond so early into the fiscal year,” said B Prasanna, head (treasury), ICICI Bank.
Typically, such benchmark setting used to happen once a year. Bond dealers say such this may create confusion in the markets on rate setting.
Further, when the outstanding touches ~1.2 trillion, people may not take positions on existing bonds fearing a stop in issuances.
That will push up yield.
The high-borrowing programme has upset normal rules of investing for many in the market. The original plan was to raise ~7.8 trillion for FY21, but the target was subsequently raised by 53.85 per cent, to ~12 trillion. In the first half, ~5.16 trillion was raised, with the green shoe option used to raise a further ~60,000 crore.
The RBI has also engaged in yield management by switching short-term bonds with longer dated bonds. The 10-year bond launched in May still has ~16,000 crore of room left on that, which could be used to switch auctions during the rest of the year, said Prasanna.
Additionally, the 10-year security is the ninth security to be made available to foreign portfolio investors under the fully accessible route. Therefore, this will also increase the availability of securities for foreign investors to take positions in, and boost foreign currency flow.