How the new benchmark bond yield may cheer investors near term

MUMBAI: Bids at the government bond sales on Friday may cheer debt investors as the yields at which they have been sold indicate that near-term bond issuances by companies could yield higher returns than what they were getting in the past few months.

The 10-year bonds were auctioned to yield 7.59%, compared with 7.74% for similar bonds in the earlier series. This time the yield gap between the two bonds (old and new series) with similar maturity period fell to 15 basis points, from as high as 30-40 basis points in the past, signalling that the so-called liquidity premium is shrinking. A basis point is 0.01 percentage point.

"We believe the pricing of the new 10-year benchmark is legitimate, which will enable good trading appetite in coming days," said Soumyajit Niyogi, interest rate strategist, SBI DFHI Primary Dealership. "A combination of external factors, including the China meltdown, Europe conundrum, and US Fed rate hike had dented investment sentiment towards the end of last year."

The Reserve Bank of India sold 8,000 crore worth of benchmark bonds on Friday maturing in 2026. Totally, the central bank sold 14,000 crore worth of bonds, including of other maturities.

A corporate bond is priced in sync with the benchmark bond. So, the coming issuances should offer higher rates with the new benchmark yield remaining at the same level.

A few days ago, the government treasury bill sales, a short-term instrument of up to one year maturities, too reflected low investor appetite. The 9,000-crore auction was subscribed fully as the central bank did not accept all bids as investors were looking for higher rates.

After a 50-bps one-off rate cut on September 29 last year, the sovereign yield slid to 7.52% pushing prices up. Later, a weak global investment sentiment along with worries over domestic policy logjam has dampened investment appetite. The yields shot up to 7.75-7.80% levels, just about 7-10 bps lower than the level seen at the beginning of the year.

Globally, investors are seeking safety of dollar-backed assets as the world economies, including China, are struggling to grow. But, India stands out with a fairly stable currency and robust macro-economic factors.

"Despite being relatively better placed, we cannot stay immune to global shocks. This is also reflecting in our investment sentiment," said a dealer from a large primary dealership company.

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