New 10-year bond priced at 8.4% coupon rate

The market has priced the new 10-year bond at a coupon rate of 8.4 per cent, 43 basis points below the exiting 10-year benchmark 8.83 per cent 2023 bond. With the auction of the new 10-year bond at a coupon rate much below the existing 10-year bond, the market expects interest rates to fall.

In the when-issued market, the yield on the new 10-year bond had even fallen to 8.37 per cent during the intra-day trade on Friday. In the when-issued market, those bonds are traded when the paper is authorised, but not yet issued. The Street expects this bond would soon replace the exiting 10-year benchmark. With the coupon rate coming much lower for the new 10-year bond, the cost of borrowing for the government is going to come down.

"Market expects bond yields to come down and the signal is that interest rates will also come down going forward. This bond will become the new 10-year benchmark probably in the next 7-15 days from now. The yield on the new 10-year bond may come down further as traders who could not buy this bond in the auction may look for buying this bond from the secondary market," said Debendra Kumar Dash, associate vice president (treasury), Development Credit Bank.

According to Clearing Corporation of India (CCIL) limited, the bond was last traded at 8.39 per cent on Friday, while the existing 10-year bond yield ended at 8.67 per cent.

"The yield on the new 10-year bond might fall to 8.30-8.35 per cent next week due to demand from traders. However, low yield on this bond might not be sustained as the existing 10-year benchmark is trading at a much higher yield. A 30 basis points spread is not justifiable," said Balginder Singh, a government bond dealer at Andhra Bank.

The broad trading range for the new 10-year bond is seen between 8.42 to 8.30 per cent next week. The yield on the existing 10-year benchmark may climb up further as it carries a liquidity premium. Banks had already been selling the existing 10-year benchmark to make space for the new paper.

The total borrowing requirement for the government in 2014-15 has been budgeted at Rs 6 lakh crore or 4.7 per cent of GDP. The net market borrowings of Rs 4.61 lakh crore has been budgeted to finance 86.8 per cent of the fiscal deficit.