Banks seek higher supply of longer-tenure bonds in the second half

Lenders (or banks) are advocating for the government to augment the supply of bonds in longer tenure in the second half (H2) of the current financial year, market participants said.

The Reserve Bank of India (RBI) has been engaging in consultations with market participants as part of the process of finalising the borrowing calendar for the second half.

"Banks have requested to increase the supply in longer tenure and minimise the supply in shorter tenure. Because we are seeing that there is hardly any spread between short-term and long-term paper, and inversion is there. So in order to reduce the inversion, we have requested to increase long-term paper and reduce short-term paper supply," a dealer at a state-owned bank said.

The RBI met with the treasury heads of the banks on Wednesday. Meanwhile, the meeting with primary dealerships (PDs) is scheduled on Monday, market participants said.

A section of the market speculates that stand-alone PDs might request the centre to keep the supply concentrated in 7-year to 14-year papers.

"Bank PDs are requesting longer tenure papers; however, stand-alone PDs might prefer the supply to be concentrated in the 7-year to 14-year papers, because those who have the positions in the longer end of the security are mostly, like stand-alone PDs, who buy/sell on behalf of clients. We will definitely ask the supply to be in the 7 to 14-year zone only," a dealer at a PD said.

"Banks believe that the demand for bonds will be robust in the longer tenure from insurance companies and pension funds; that's why they want some amount from 7-year to 14-year to be shifted to above-14-years segment," he added.

As per the existing schedule, the central government aims to borrow a total of Rs 15.43 trillion through bond sales in the current financial year, with approximately 42 per cent of this amount planned to be borrowed during the October-March period.

As per the borrowing calendar for the first half of the current financial year, the government aims to borrow 6.31 per cent through 3-year bond, 11.71 per cent through 5-year bond, 10.25 per cent through 7-year bond, 20.50 per cent through 10-year bond, 17.57 per cent through 14-year bond, 16.10 per cent through 30-year bond, and 17.57 per cent through 40-year bond.

A trader at another PD said that the introduction of 20-year bonds seems unlikely. "Banks rarely go for papers above 14-year, and pension funds and insurance companies go for longer tenure like 30-year, and 40-year. Additionally, the 14-year and 20-year tenures are too close; there won't be demand for 20-year, so it will be devolved on PDs. I don't think the RBI would want that," a dealer at a PD said.