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For bond traders, 12-year paper is the new benchmark

The 12-year bond, with a coupon of 9.15%, has emerged as the most traded government bond in the past few weeks.

, ET Bureau|
Jun 27, 2012, 08.56 AM IST
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MUMBAI: Record government borrowing is creating a dilemma for the bond market traders in choosing its benchmark. Investors used to trading the latest liquid 10-year bonds are shifting to higher-yielding 12-year bonds since the central bank may be constrained from issuing sufficient quantities.

The 12-year bond, with a coupon of 9.15%, has emerged as the most traded government bond in the past few weeks. About 440 trades, aggregating Rs 3,450 crore, were transacted on Tuesday, data from the Clearing Corporation of India shows. This compares with just 54 trades for the 10-year benchmark bonds.

"It could be due to huge repayment dues in that particular year that could push RBI to issue papers in other tenors," said Madan Sabnavis, chief economist, Care Ratings, "If you look at how government's net borrowings have increased over the years, repayments are bound to increase sharply in the years to come."

India government's bond sales have been calculated in such a way that a future government is not saddled with very high repayments. The unwritten belief is that bond sales are done in such a way that in a particular year the government of the day need not pay more than Rs 60,000 crore. But the table seems to have turned with repayments worth Rs 2.27 lakh crore coming up in 2022, the highest in any year, which could limit new bond sales maturing that year.

With the government borrowing a record Rs 5.7 lakh crore and little signs of fiscal prudence, yields are high. Indeed, the Reserve Bank of India's decision not to lower interest in the last monetary policy review has led to a view that rates may remain high for some time.

Yields on 10-year bonds closed at 8.10%, up from 8.08%, while yields on the 12-year bond closed at 8.38%, up from 8.35%.

But trading volumes in the 10-year bonds have to rise given that traditionally it had been the benchmark and the central bank may have to sell bonds of those tenors, traders say. So far, the RBI has issued the 10-year bonds worth Rs 7,000 crore and will re-issue it for a similar amount this Friday.

"I perceive this bond to be issued every alternate week for six months," said Arun Khurana, country head, global markets group at IndusInd Bank. "Primary issuance has to be done as it is a benchmark security and will require liquidity. But redemption pressure will be huge. So, actually I would be concerned with such a lumpy redemption."

Debt analysts expect the critical level around Rs 30,000 crore, for the new benchmark to pick up trading volumes. Nationalised banks and other financial institutions tend to hold these bonds in their held-to-maturity category which is not available for trading. It takes time before the stock of bonds gather a critical mass of trading volume.
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