40-year govt bonds set to grab the attention of insurers, pension funds

These long tenure bonds will help to develop the yield curve beyond 30 years

The long-term bonds of 40-year maturity to be auctioned by the central government for the first time in the next financial year are set to grab the attention of insurance companies, pension funds and provident fund players.

The current highest maturity is 30 years. These longer tenure bonds will help to develop the yield curve beyond 30 years.

Finance Secretary Rajiv Mehrishi had on Monday said the government would use these 40-year bonds to borrow up to Rs 10,000 crore and the dates were yet to be finalised for the launch.

According to the issuance calendar of marketable dated securities for the first half of the financial year (April-September), issued on Monday, for every week beginning April, the Reserve Bank of India (RBI) will auction a 20-year and above security for an amount in the range of Rs 3,000-4,000 crore. The government will borrow Rs 3.6 lakh crore in the first half.
 

“All insurance companies will be interested in these bonds because almost all of them offer annuity products. In these products, long-dated bonds are required,” said Badrish Kulhalli, head of fixed income at HDFC Life.

Annuity products by insurance companies feature a pre-determined periodic payout amount until death of the annuitant.

According to Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities, insurance companies, pension fund companies and provident fund players find investment avenues beyond 20 years to be tough, due to which they'd like to put money here.

However, these insurance companies and pension fund players might also hold these bonds till maturity, due to which the liquidity of these securities in the secondary market could be poor. “Apart from insurance companies, provident fund companies might also buy these bonds but might not trade on the holdings. Whatever they buy, they might decide to hold till maturity,” added Kulhalli.

“These bonds will match the profiles of insurance companies and pension fund players. Fund houses will show interest only if there is some secondary market price discovery that accompanies the bonds,” said Suyash Choudhary, head-fixed income, IDFC Mutual Fund.

TWO SIDES OF A COIN
The pros and cons of 40-year government bonds

Pros:

• These will find good demand from insurance companies, pension funds and provident fund players
   
• This is probably a good time to launch these, since interest rate cycle is heading down
   
• Totally secure since these are government bonds
   
• These bonds will help to develop the yield curve for long-dated securities

Cons:

• These bonds might lack liquidity in the secondary market
  

 

Banks and fund houses might not be keen on buying these
 

These bonds are subject to interest rate risks since these are as long as 40 years
 

Like all other bonds, these bonds might also underperform stocks in the long term