There’s so much supply of benchmark 10-year bonds in India that investors are starting to look for refuge in other tenors.
That’s becoming evident as the government announced the auction of a new 10-year bond for Friday, just two months after a similar issuance, instead of selling it about once a year. Some investors expect the supply glut to reduce of the appeal of the benchmark debt, while spreading out demand across tenors.
“Earlier there was a massive polarization where only one bond used to command the bulk of the market liquidity and other bonds were completely on the fringe,” said Suyash Choudhary, head of fixed income at IDFC Asset Management Ltd. “If the market liquidity distributes among two to three bonds as it’s beginning to happen, that could be an unintended consequence which could be beneficial,” he said.
The government has already sold about 1 trillion rupees ($13.4 billion) of the benchmark 10 year bond since it was first issued in May. Choudhary estimates that the government may have to sell a new benchmark every quarter to complete its 12 trillion rupees issuance plan for the fiscal year ending March 2021.
The yield on the existing 10-year note climbed to 5.88% on Tuesday, the highest for a benchmark bond in four weeks on the news of the new sale, while the 6.19% 2034 bond yield fell two basis points. Even as the benchmark yield has retreated since then, a shift in investor demand to other tenors could increase market liquidity and enhance price discovery in the nation’s $850 billion bond market.
“It’s good for the pricing of surrounding bonds,” Choudhary said.