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Traders see RBI testing market with biggest 10-year bond

Traders see RBI testing market with biggest 10-year bond

01 Jul 2021

By Ronojoy Mazumdar

Bond traders expect India’s central bank to auction a record amount of its current benchmark 10-year bond, a measure that could give it an edge in capping yields.

While selling more bonds would typically lead to higher yields, the Reserve Bank of India has better control over the sales of an existing benchmark since it already owns a majority of it.

The Reserve Bank of India, which has been locked in a tussle with bond traders to keep yields anchored near 6 per cent, has to cap borrowing costs while managing the government’s near-record debt issuance plan. It may raise 1.5 trillion rupees to 1.6 trillion rupees ($20.2 billion – $21.5 billion) from the current 10-year bond, according to the median estimate of six traders surveyed, the most on record based on data compiled by Bloomberg.

RBI -- 10-year yieldsBloomberg

“This is something innovative as we haven’t seen this amount of borrowing on a 10-year note before,” said Harish Agarwal, a fixed-income trader with FirstRand Bank in Mumbai.
The move would mark a continuation of RBI’s unconventional policy measures to cap yields, that includes Operation Twists as well as open market bond purchases, as it walks a tight rope between spurring growth in the virus-battered economy without adding to inflationary pressures.

The RBI has auctioned about 1.19 trillion rupees of the current 10-year benchmark note, close to the 1.23 trillion rupees it raised from the previous one. Expectations of further issuance in the current note are also strengthened by the absence of an announcement for a new 10-year bond.

India’s central bank usually seeks to avoid issuing large amounts of debt for a particular bond as it can create lumpy repayments at maturity.

Staying Put

The RBI “would rather have the current 10-year as the benchmark for as much time as possible, because right now they have control over the yield for this benchmark,” said Vijay Sharma, executive vice president for fixed income at PNB Gilts Ltd.

The yield on 5.85 per cent 2030, the current benchmark, has climbed only three basis points in June, while that on the five-year and 40-year paper has risen 13 basis points and 14 basis points respectively. The 10-year yield fell one basis point to 6.04 per cent on Thursday, while the five-year yield dropped two basis points.

Last week the RBI rejected all bids for the benchmark 10-year note in a sign that traders may have sought higher yields. It’s a step the central bank has used several times in the past, while also getting underwriters to buy the unsold debt.

The RBI may also be delaying the issuance of a new 10-year note as market interventions through the current bond may be more effective, given that it commands more liquidity, Agarwal of FirstRand Bank said.