New 10-year bond set to become benchmark after auctions: Dealers

The new 10 year bond – 7.18 per cent, 2033 – is likely to become the benchmark after four more auctions as yields are largely stable and the outstanding volume is set to touch Rs 50,000 crore, said dealers.

The government sold Rs 14,000 crore of the bond for the first time in an auction on Friday, drawing firm demand from the market. Dealers said that state-owned banks stocked up on the majority of the first issuance.

“The new 10-year bond…will become the benchmark in the next three to four auctions because the volatility is relatively low as compared to when the current benchmark 7.26 per cent (coupon rate) 2033 bond was introduced," said a dealer at a state-owned bank. “Everyone wants to get their hands on a new bond, the volume and the outstanding amount should be good enough after four auctions for it to be considered a benchmark.”

Typically, a new bond becomes a benchmark after it becomes the most traded one in the secondary market.

Though the new bond’s coupon was set just 1 basis point lower than the yield on the current benchmark bond, it quickly ascended to the second position on the trading chart of the Reserve Bank of India’s Negotiated Dealing System-Order Matching platform.

“The overall demand at the auction was not as it used to be in the past years. And there were no fresh cues for the market to look at,” said another dealer at a state-owned bank. “But considering that it is a 10-year bond the volume picked up soon in the secondary market.”

The spread between the new 10-year bond and the current benchmark has inched up to 2 basis points.

The current benchmark bond took more time than usual to replace its predecessor 7.26 percent 2032 as the benchmark security, because of limited trade volume.

A few factors led the bond's volume to lag. The bond only saw a total issuance of only Rs 52,000 crore across four auctions in more than two months after its first issuance on February 3. This is because the government's borrowing programme for Financial Year 2022-23 ended on February 24.

The current benchmark 10-year government bond has an outstanding amount of Rs 1.5 trillion. The amount is usually considered an informal threshold for a bond to be declared illiquid. Since the Covid-19 pandemic, new 10-year bonds were issued more frequently as the amount of government borrowing in a financial year increased sharply.