RBI to issue new 40-year benchmark bond on Thursday, raise Rs 7,000 crore

The 40-year bonds are the highest tenured bonds issued by the government

The Reserve Bank of India (RBI) will introduce new 40-year benchmark bonds next Thursday, it said in a notification on its website. The 40-year securities are the highest-tenured bonds issued by the government.
 
It was first introduced on October 26, 2015, and the government raised Rs 1 trillion from it. After that, another set of 40-year bonds was issued on May 6, 2019, and Rs 83,462 was raised. However, in 2020, two 40-year bonds were issued – one on April 30 and another on August 31. The bonds have been used to borrow Rs 2 trillion from the market. The reason why the second bond came in quick succession to the first was because the first one had hit nearly the Rs 1-trillion borrowing mark. The government issued another set of papers to ease the redemption pressure. 
 
The new bonds will be used to raise Rs 7,000 crore, and be part of a Rs 31,000-crore borrowing programme to be done using four securities. The central bank will decide whether to retain an additional Rs 2,000 crore in each security, it said in its statement.
 
Therefore, in this fiscal year, the government will be issuing three 40-year bonds – in line with its three 10-year benchmark bonds’ issuance. 
 
The 40-year bonds are illiquid in the market. On Friday, only 18 trades happened in this segment for a total of Rs 245 crore. The most traded was a bond maturing in 2035, with 513 transactions for a value of Rs 5,495 crore.

 
The reason why the longest-tenure bonds are illiquid is because they are bought by insurance companies and pension funds, who hardly trade in the secondary market. Banks that buy these bonds keep them in the held-to-maturity (HTM) basket so that they don’t have to incur mark-to-market losses. 
 
According to a senior bond dealer, the longer-tenure security is a better option in an oversupply condition because long-term investors crowd in to participate in auctions.
 
These ultra-long-term bonds are not popular with banks or other investors as they cannot be traded in the market later on. However, that would mean pushing payment liabilities way down the years, which increases burden for the government in the distant future.
 
Another measure pursued by the government is to convert short-term securities into longer-tenure bonds. In this, the government bunches up short-term securities in favour of a few long-term ones instead. According to schedule, this conversion was to take place every third Monday. However, according to a notification of the RBI, the next switch auction will not happen. The 40-year bond issuance announcement came after that. 
 
The government plans to borrow Rs 80,000 crore extra in this fiscal year, and Rs 12 trillion next year. The high borrowing programme has scared bond dealers but the central bank is trying to keep the yields low by various measures. These include open market operations (OMOs), through which it buys bonds from the secondary market.