The Reserve Bank of India (RBI) and the government have once again introduced a new 10-year benchmark bond as the old one crossed Rs 1 trillion in outstanding. This is the third benchmark 10-year bond in this calendar, indicating the sheer volume of bonds getting issued by the government.
New bonds are issued after a particular volume is reached as it helps avoid bunched up redemption payment at the time of maturity.
The 10-year bond is the most marquee bond in the market. The repeated issue of such bonds takes away some of its value in the eyes of investors, say experts.
According to bond dealers, a quick benchmark setting can create some confusion in the markets on rates. When the outstanding comes close to Rs 1.2 trillion, people may not take positions on existing bonds fearing issues will stop. That will push up yields.
“The RBI usually stops issuing a bond once the total outstanding amount reaches approximately Rs 1.2 trillion. Given the enhanced government borrowing this year, we have had a third 10-year benchmark issue this year. The frequent change in the 10-year benchmark has led to a reduction in the ‘premium’ that the benchmarks have been enjoying earlier,” said Badrish Kulhalli, head of fixed income at HDFC LIfe Insurance.
The government on Friday raised Rs 8,000 crore through the new 10-year bonds at a coupon of 5.85 per cent. The new bond was part of a Rs 28,000-crore bond auction on Friday. The most traded 10-year bond yields closed at 5.91 per cent even as gross domestic product (GDP) numbers, released later in the evening, showed the economy contracted 7.5 per cent in the second quarter.
The coupon of the new bond has been slightly higher than earlier. The first 10-year bond was issued on May 11 this year at a coupon of 5.79 per cent. The government raised Rs 1.116 trillion with this bond.
The second one was issued on August 3, and the government raised Rs 1.23 trillion. Given that each benchmark is roughly covering a little more than three months, there would be unlikely another new benchmark this calendar, but the next year’s benchmark could come in this fiscal year.
The government’s Rs 12 trillion borrowing programme has been conducted at 10-year low yields.