Informist, Thursday, Mar 28, 2024
By Aaryan Khanna and Nishat Anjum
MUMBAI/NEW DELHI – Bond investors were already eager to pile on gilts as demand-supply dynamics were favourable for the first time in the last half a decade. Now, the government's modest ask from the market in Apr-Sep is set to pull bond yields lower, with short-term bonds likely to outperform longer-dated tenors in the uneven borrowing calendar, steepening the yield curve, dealers said.
After market hours on Wednesday, the government said it would borrow 53.08% of the 2024-25 (Apr-Mar) gross market borrowing target of 14.13 trln rupees in Apr-Sep, lower than the usual borrowing of around 58% for the first half of previous years. For some sections of the market, the planned issuance of 7.50 trln rupees is nearly 1 trln rupees lower than what they were expecting.
"Overall borrowing is significantly lower, so the decrease was expected," said Alok Singh, group head-treasury, CSB Bank. "But you can say that this year around, they largely distributed it evenly into two halves, as compared to last year, when it was slightly loaded in the first half."
While the quantum was a surprise, the broad structural contours of the calendar weren't. The market has not been keen on short-term bonds since rates started rising in May 2022, and the government has tilted its issuance towards long-term bonds since the Oct-Mar calendar of that year. Still, the specifics show some variation within the broader trend.
The 10-year bond, considered the benchmark in the gilt market, again drew the highest issuance, at 24.0% of the Apr-Sep borrowing. But the concentration in this segment is the highest in recent memory, dealers said, drawing from both the 3-7 year maturity bucket and the new 15-year segment, which replaces the 14-year bond. Investors are likely to take the 200-bln-rupee issuance size per auction in their stride, especially with the 10-year bond being offered once every three weeks instead of fortnightly.
The change in pattern and the uneven nature of the calendar remains a mystery for the market – the weekly auction size will range from 200 bln rupees to 380 bln rupees. Trading activity is likely to be more robust in the weeks when the 10-year bond is up for auction, dealers said.
The transition from the 14-year paper to the new 15-year segment is likely to be smooth, as the difference of just a year will have minimal impact on investors' asset-liability books, dealers said. An additional positive is that the 15-year tenure is more palatable to foreign investors, who have been indulging increasingly in India's bonds under the fully accessible route because these will be included in the JP Morgan Government Bond Index – Emerging Markets starting June.
The yield curve is likely to steepen first in the 3-7 year segment, propelled by demand for such securities by foreign portfolio investors and the lack of supply. However, the steepening of shorter-tenure depends strongly on easier liquidity conditions, a key reason why the outperformance against the 10-year bond today was restricted to 2-3 basis points.
There is some attempt at elongating the maturity of government debt, Madan Sabnavis, chief economist at Bank of Baroda, said. Sabnavis lent his voice to the view of traders that the restraint shown by the government in Apr-Sep was because it anticipated heavier debt purchases by foreigners in the second half of the year, when Bloomberg would also add India's gilts to its emerging market local currency index.
The Reserve Bank of India will be uncomfortable with short-term bond yields falling steeply amid the Monetary Policy Committee's "withdrawal of accommodation" stance and uncertain global conditions, dealers said. Moreover, any potential open market sales of gilts by the central bank is likely to slot into these tenures, and the Separate Trading of Registered Interest and Principal of Securities, or 'STRIPS' of long-term gilts will generate more supply out of auction.
The yield curve between the 364-day Treasury Bill and the benchmark 10-year bond, which is currently inverted, is seen correcting as gilt supply resumes on Apr 5 after a break of a month and a half. However, the spread might not widen beyond 2-4 bps unless the central bank loosens its grip on liquidity in April, dealers said.
According to dealers, the calendar was set along the lines of market feedback given earlier this month, with a noticeable skew to long-term bonds – a culmination of a trend that started in the borrowing calendar for Oct-Mar 2022-23. Following requests from long-term investors to ensure adequate supply of gilts to match their liabilities, government borrowing through bonds maturing in 30 years and above comes out to 37.33%, an increase of 10 percentage points over the calendar from two years ago. More importantly, despite a sizeable fall in Apr-Sep borrowing on year at 1.38 trln rupees, the government's supply of long-term bonds is only 190 bln rupees lower than in the same period last year.
Consequently, the spread between the 10- and 40-year bonds, which is currently 8 bps, is also seen widening. If the supply dynamics and eventual ease in interest rates are taken into consideration, the 10-, 15- and long-term segments are expected to settle into distinct places on the yield curve rather than the flatness over the past year, dealers said. The newly introduced 15-year bond will account for 13.9% of the Apr-Sep borrowing, down from 17.6% for the 14-year bucket a year ago.
"The share of long-term bonds in the borrowing calendar is along expected lines," said Churchil Bhatt, executive vice president-investment at Kotak Life Insurance Co. "The state bond supply recently has allowed many investors to deploy the bulk of their cash in March itself. This, in turn, may moderate investor demand for April supply proportionately."
The novelty of a sovereign green bond issuance in the first half of the year, that too in the 10-year segment, is likely to have been added to lure foreign investors, as domestic traders are likely to avoid bidding for this supply at a green premium, or 'greenium', dealers said. While sovereign green bonds of five, 10- and 30-year maturities have been issued since 2022-23, all such issuances have been kept to the Oct-Mar period. The government will continue to avoid issuing floating rate bonds, which have remained out of favour with investors and were not demanded by the market, dealers said.
There are concerns that the uneven supply pressures may end up hurting traders more than investors. Adding to this is the absence of short-term bonds from some auctions, which will keep demand from mutual funds and banks for their asset-liability needs at bay.
Gearing up for the new financial year, a section of the market also pondered whether the lower supply would persist after the Union Budget is presented by the new government following the General Elections scheduled for Apr 19-Jun 1. However, immediate favourable demand-supply dynamics leave little space to worry about it. End
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