First ever sovereign green bond auction lapped up at lower-than-mkt yields

PSU banks, insurers show firm demand at sale, traders say; FPIs likely bought 700 crore after auction

The government’s first ever sale of green bonds was greeted with strong demand by investors, with the securities being issued at lower yields than those prevailing on regular sovereign bonds of comparable maturity.

The Reserve Bank of India on Wednesday conducted the government’s maiden sale of green bonds, with a total of Rs 8,000 crore worth of two securities – a five-year bond and a ten-year bond - being sold.

As had been anticipated by traders ahead of the auction, the sale saw robust demand from state-owned banks. Insurance companies were also said to have participated strongly at the debt sale, dealers said.

“There was good demand from PSU banks and insurance companies. Further, FPIs have likely picked up at least Rs 700 crore of the green bonds,” ICICI Securities Primary Dealership head of trading Naveen Singh said.

The cutoff yield for the five-year paper was set at 7.10 per cent, while that for the 10-year green bond was set at 7.29 per cent, the result of the auction showed.  On Tuesday, the regular 10-year benchmark government bond yield closed at 7.35 per cent, while the most liquid five-year bond yield settled at 7.15 per cent.

The regular 10-year benchmark paper settled at the same yield on Wednesday, while the regular 5-year bond closed one basis point higher.

Reported deals on the RBI’s Negotiated Dealing System-Order Matching trading platform showed that trades worth Rs 680 crore had occured in the 10-year green bond and those worth Rs 225 crore had occurred in the five-year green bond. The reported deals segment is often an indicator of FPI activity in bonds, traders said.

In a bid to encourage overseas participation, the RBI has said that green bonds will be designated as securities under the 'Fully Accessible Route' for foreign investors.

Last week, the insurance regulator Irdai said that insurance companies’ investment in green bonds would be treated as investment in infrastructure in a bid to boost participation.

Greenium

Essentially, the government sold the five-year and ten-year green bonds at lower yields than those prevailing on its regular securities. In market parlance, this premium is referred to as a ‘greenium’ in the case of green bonds.

The cutoff yield, or the coupon on a bond, is the rate of interest paid out periodically by the government to investors who bought its debt.

Globally, green bonds are issued at a premium as the instruments, by design, are meant to facilitate access to cheaper capital for environmentally-friendly projects.

“Two aspects will be of interest, a) whether these bonds are cost-effective i.e., cheaper than conventional bonds or command a ‘greenium’, and b) while domestic investors are likely to dominate the demand pool, an eye will also be on the appetite for rupee-denominated green bonds by global fund houses, as opposed to the dominance of hard currency green papers in the offshore markets,” Radhika Rao, senior economist DBS Bank wrote.

In recent discussions with the RBI, some bond market participants are said to have floated the idea of the government issuing green masala bonds, or rupee-denominated offshore green bonds in order to attract greater foreign investment.

If the government were to issue rupee-denominated offshore green bonds, the exchange rate risk would be borne by the investors, unlike a dollar-denominated bond, which would render the Centre vulnerable to currency fluctuation.

Given that Indian bonds offer higher yields than debt instruments in advanced economies and several emerging market economies, a masala bond could evince healthy interest from overseas investors, dealers said.