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Insurance companies came to the rescue of India’s biggest government bond auction of Rs 20,000 crore on Thursday. The bond offer was fully subscribed, leading to softening of yields on the government paper.
The yield on the 10-year benchmark government bond fell 11 basis points during the day.
In addition, the 7.37 per cent 2014 paper, which matured on Wednesday for an amount of Rs 41,000 crore, helped create ‘replacement demand’ in the auction.
“Market participants had sold bonds in the recent past in anticipation of this large auction. The auction was well-bid and market reacted very positively to that. The 7.37 per cent 2014 bond matured on Wednesday and this was the 10-year benchmark bond 10 years ago,” said R Sivakumar, head of fixed income and products, Axis Mutual Fund.
The Reserve Bank of India (RBI) sold four papers and the bond with the longest tenure in the auction was 9.23 per cent 2043. This bond was auctioned on April 4, too, but on that day there was partial devolvement on primary dealers for Rs 864.16 crore.
“The large bond maturity that happened on Wednesday induced quite a bit of replacement demand. Besides, insurance companies, especially LIC, receives the bulk of their premium in March. That amount typically gets deployed in April,” said Badrish Kulhalli, head of fixed income at HDFC Life.
A senior LIC executive confirmed the state-run insurer had taken part in the auction but declined to specify the quantum it bought. The official added LIC had seen a double-digit premium growth for 2013-14 and this amount had been invested in this auction, which was an attractive opportunity.
“Earlier there were fears the yield could go to 9.25 per cent on the 10-year bond. But the demand for bonds from long-term players, especially insurance companies, tempered the expectations. The yield will stay largely range-bound. The market expects the range of 8.80 per cent to 9.10 per cent till the general elections are over. If the yield breaches nine per cent, we would again see buying interest,” said HDFC Life’s Kulhalli.
The yield on the 10-year benchmark government paper on Thursday ended at 8.85 per cent, a level close to the yield last seen in March. The yield dropped 11 basis points from the previous close of 8.96 per cent. A similar drop in the 10-year bond yield was last seen in on December 18, when it had fallen 12 basis points to 8.79 per cent.
However, the headline Consumer Price Index (CPI) -based inflation in March accelerating to 8.31 per cent on a year-on-year basis from a 25-month low of 8.03 per cent in February had slightly dampened sentiment for the bond market.
According to the issuance calendar of marketable dated securities, RBI is planning to auction bonds worth Rs 3.68 lakh crore in the first half of the financial year. The weekly auctions are spread in the range of Rs 14,000-16,000 crore, with only two weekly auctions of such large quantum of Rs 20,000 crore. The next auction of Rs 20,000 crore will take place in the middle of next month.
