New benchmark bond to lower govt's borrowing Cost

The 7.80 per cent 2020 paper is now the new benchmark (10-year bond) for assessing the yield trend. It will replace the existing benchmark — 6.35 per cent paper, also maturing in 2020.

The coupon, which was fixed by the Reserve Bank of India (RBI) for an auction on Friday, was lower than what the markets expected and this provided comfort to dealers. The market expects RBI to accept bids at 7.86 per cent.

The lower coupon rate for the benchmark paper will mean relatively less interest payment burden for the government, which has huge borrowing plans.

The newly auctioned 7.80 per cent, 2020 paper closed at 7.75 per cent yield in the secondary market.

The other two papers auctioned on Friday were the 7.38 per cent, 2015 gilt and the 8.28 per cent, 2032 bond, for which the central bank has set a cut-off of 7.40 per cent and 8.42 per cent, respectively.

A senior SBI official said yields were coming off from higher levels seen in the recent past. Liquidity in the system was ample and higher foreign inflows could bring more resources in the system.

The yield on the prevailing 10-year paper (6.35 per cent, 2020) has been around 8.05 per cent. On this, if you discount the illiquidity premium and also take into account the spurt of demand for the new benchmark, 7.80 per cent is a fair level,” said a dealer with a public sector bank. The 6.35 per cent, 2020 paper ended at 8.03 per cent on Friday.

The trend in the yield movement has made changed. The positive news on inflation (soft landing) and delayed recovery in global economy, which means rate hike by central banks still away, would reduce pressure on yields, according to Moses Harding, head (global markets group), IndusInd Bank.

However, not all dealers shared the comfort over the cut-off for the much-awaited 10-year gilt. A senior dealer with a bond house said the coupon for new 10-year paper was not in sync with market expectations and might witness a correction in coming days.

Next week, traders may look to buy the newly 7.80 per cent, 2020 bond to build holdings in the new benchmark. However, because of the low floating stock, market participants could also buy bonds across other tenures.

Early trade may be influenced by overseas cues such as US treasury yields and crude oil prices.