India sold so many bonds that it had to retire its benchmark

By Kartik Goyal

India is selling so many bonds that the market can’t keep up.

The government is retiring the current benchmark 10-year debt just two months after it was issued, compared to about 12 months for earlier offerings, to make way for a new issuance. The present bond hasn’t even had a chance to become fully liquid before being shelved.

Blame the phenomenon on the government’s super-sized funding plan. The authorities plan to sell a record 12 trillion rupees ($160 billion) of bonds this fiscal year to finance a yawning fiscal deficit triggered by a months-long lockdown on the economy.

“Earlier the new bond used to be issued only once in a year, now given the huge size of borrowings we can expect the 10-year benchmark will be issued every quarter,” said Naveen Singh, head of fixed-income trading at ICICI Securities Primary Dealership Ltd. in Mumbai. “That will make it lose its vanity value.”

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In the past, the Reserve Bank of India has tended to bring a new 10-year note to the market after raising about 1 trillion rupees from the tenor within a year. But this time, it’s issuing a new bond after having raised the amount in less than three months.

The upshot is that the 10-year bond may lose some of its premium as the government cycles through frequent issuances. Since the beginning of May, the bulk of borrowings has been in this segment due to its popularity with investors given that it tends to be very liquid.

The spread between the new and old paper may narrow to 7-8 basis points from about 20 basis points as the 10-year notes lose their appeal, Singh said.

The yield on 10-year bonds fell one basis point to 5.84% Wednesday. It rose to 5.88% on Tuesday, the highest for the benchmark since July 1, after the central bank said it’ll sell new 10-year debt.

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