Shorter tenure bonds see higher trader interest

Trading volumes in 5-year bond exceed 10-year benchmark

The trading interest of the Street shifted on Wednesday to the 7.83 per cent 2018 government bond, ahead of the Friday auction in which this paper will be re-issued.

The highest trading volume is generally seen in the 10-year benchmark bond 8.15 per cent 2022, as it is considered the most liquid paper. But since the 7.83 per cent 2018 will be re-issued, the Street considered it more liquid.

According to the website of Clearing Corporation of India Ltd, the trading volume for the 7.83 per cent 2018 bond was Rs 11,379 crore on Wednesday, compared with Rs 130 crore the previous day. The volume for the 8.15 per cent 2022 was Rs 7,158 crore, compared with Rs 16,005 crore the previous day.

“In the four-five year segment, traders are quite bullish. Most of the issuances will happen in the greater than five-year segment, due to which up to five-year papers are protected from incremental supply. Besides that, the incremental rate cuts will benefit the shorter-end more. Since this paper is getting re-issued, traders will not worry about liquidity as well,” said Suyash Choudhary, head-fixed income, IDFC Mutual Fund. This paper’s maturity is exactly five years away from now.

The 7.83 per cent 2018 was issued on April 11, 2011, and on Wednesday was the first time the volumes soared to these levels. The 7.83 per cent 2018 will also be re-issued by the Reserve Bank of India in Friday’s government bond auction, for Rs 3,000 crore.

“People are realising that the yield curve will start steepening. If that happens, the best place to be is the five-year maturity paper. It is neither too short or too long. This interest in the five-year paper might continue for some time,” said Mohan Shenoi, president, group treasury and global markets, Kotak Mahindra Bank.

The dues on the 7.83 per cent 2018 paper were Rs 64,000 crore as on April 8, and Rs 70,000 crore for the 8.15 per cent 2022 paper. “People are not taking much position in the 10-year benchmark 8.15 per cent 2022 because the Street knows it will become illiquid with the issue of a new 10-year benchmark. This paper will also be reissued in Friday’s auction,” said Prasanna Patankar, senior vice-president at STCI Primary Dealer.

The yield on the 7.83 per cent 2018 bond ended at 7.76 per cent on Wednesday, compared with the previous close of 7.87 per cent.

On the 8.15 per cent 2022 bond, it ended at 7.90 per cent, compared with the previous close of 7.88 per cent.