The yield spread between 10-year state bonds and 10-year government bonds has widened by 8-10 basis points (bps) in the current quarter of the financial year (2023-24, or FY24) due to the increased supply of state bonds, according to dealers.
In the state loan auctions held on Tuesday, 11 states raised Rs 11,620 crore. The 10-year state bonds witnessed cut-offs ranging from 7.65 per cent to 7.68 per cent, indicating a yield spread of 40-41 bps compared to the central government paper.
Goa and Haryana secured lower cut-offs at 7.65 per cent, whereas Arunachal Pradesh experienced a higher cut-off.
The yield on the benchmark 10-year government bond settled at 7.27 per cent on Tuesday.
“It is the supply pressure. In the third and fourth quarters, the net supply of (central) government securities is very low. While the auction sizes of state development loans are much higher than what they were in the first (Q1) and second quarter,” said Vijay Sharma, senior executive vice-president at PNB Gilts.
The net supply of government bonds is relatively lower in the latter half of FY24, with Rs 2.8 trillion worth of redemptions, of which Rs 2.2 trillion worth of bonds will mature in the October-December quarter.
The government plans to borrow Rs 6.6 trillion in the second half of FY24, against Rs 8.5 trillion in the first half (H1).
States have raised Rs 1.4 trillion through the sale of bonds so far in the current quarter. During the October-December period, states aim to issue bonds worth Rs 2.37 trillion.
“The spread should remain at the current level until we see a major rally (fall in yield) in government securities,” said Naveen Singh, vice-president of ICICI Securities Primary Dealership.
In the previous quarter, states had borrowed Rs 1.9 trillion, which was about 80 per cent of the indicated amount. In Q1FY24, states had borrowed 84 per cent of the notified amount of Rs 1.9 trillion.
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In H1FY24, states borrowed only 82.6 per cent of their indicated borrowing of Rs 4.37 trillion.
In the previous financial year (2022-23), states borrowed only 76.8 per cent of the target amount.
“They might borrow the full amount this quarter,” a dealer at a state-owned bank said. “We, public sector banks, are also looking at the state bonds to lock in high returns,” he added.
Some market participants expect that the states might reduce their borrowing in the last quarter after borrowing heavily in the current quarter.