New 10-year benchmark bonds to be auctioned on Friday

According to dealers, a year usually sees one or two new benchmark bonds being issued.

The government will auction the new 10-year benchmark bonds, maturing in 2030, on Friday. According to dealers, this is likely to see a premium of about seven-10 basis points over the yield on the current benchmark bonds. The new benchmark bonds auction comes just two-and-a-half months after the current benchmark bonds were introduced in May.

Siddharth Shah, head of treasury at STCI Primary Dealer, said the borrowing programme this year had undergone a change and, as a result, there had been an increase in the weekly borrowing figures as well. “Previously, the benchmark bond issuance size in an auction was in the range of Rs 8,000 to Rs10,000 crore. Now, with the enhanced borrowing, that figure has changed to about Rs 18,000 crore every week. Because of this the outstanding supply of the current benchmark bond has increased. The government is issuing a single bond up to an outstanding of about Rs 1.2 lakh crore at present. So, we are seeing a new benchmark bond being issued so soon,” Shah said.

According to dealers, a year usually sees one or two new benchmark bonds being issued. Bond market participants usually provide a premium of about 15-20 basis points (bps) over the yield on the existing benchmark bond to get hold of the new paper, as it eventually becomes the most traded bond in the market. However, dealers said if new benchmark bonds were about to be introduced within a short span, the premium paid by market participants was likely to fall. What was earlier a premium of 15 bps, will now become seven-10 bps, a dealer indicated.

Indeed, when the current benchmark bonds were introduced in May, it saw a premium of about 18 basis points. The upcoming benchmark bonds were traded at 5.79% on Tuesday in the When-Issued market, six bps higher than the yield on the current benchmark bonds, a dealer said. According to the RBI, ‘When Issued’ trading takes place between the time a government security is announced for issuance and the time it is actually issued. All ‘When Issued’ transactions are on an ‘if’ basis, to be settled if and when the actual security is issued.

According to the RBI notification, the government will auction Rs 18,000 crore of the new benchmark bonds on Friday.