The Reserve Bank of India (RBI) is set to auction the new 10-year benchmark government bond on Friday, according to a notification. The bond will replace the 6.79% yielding central government securities maturing in 2027 as the benchmark 10-year paper. A total of Rs 1.21 lakh crore of the current benchmark bonds are outstanding, according to the latest RBI data. The settlement of the new bonds, which mature in January 2028, will take place on Monday. The central bank will auction the new securities worth Rs 9,000 crore along with three other securities in its weekly auction, to raise a total of Rs 18,000 crore. According to a bond dealer, the new benchmark will be priced at 10-15 basis points lower than the current benchmark yield. “Everybody wants to get a piece of the new benchmark security. If the current benchmark remains close to 7.35%, it is likely that the new security will get priced in the range of 7.2-7.25%,” the dealer indicated. On Monday, the benchmark yield closed at 7.34%.
At all times, a new 10-year benchmark paper elicits strong demand as market participants compete to buy the potentially most liquid security. Given that the 10-year sovereign paper acts as a quasi pricing benchmark for corporate bonds and other instruments, most bond traders bid aggressively to get hold of it. The new benchmark bonds will start trading in the “When-issued” market beginning Tuesday. The “When-issued’ market is where investors get to buy the new bond before getting the actual delivery of the securities through the auction. It is a pre-primary market indicative of a conditional transaction in a security authorised for issuance but not as yet actually issued.
The pricing of the new benchmark will become evident from the levels in the “When Issued” market. Last week saw a significant sell-off in the bond market on news that the government plans to borrow an additional Rs 50,000 crore through dated securities this fiscal. As a result, the benchmark yield closed at an 18-month high of 7.396% on Thursday. Bond dealers point out that apart from the arrival of the new benchmark, introduction of fresh investment limits in central government securities for foreign investors will also bring in some additional interest.
