The Government may be able to bring down its overall cost of borrowing to 7 per cent thereabouts in FY25, amid moderating Government Securities’ (G-Sec) yields in the secondary market even as market players are expecting a lower coupon rate of 6.70-6.73 per cent to emerge at the forthcoming auction of the new 10-year G-Sec vis-a-vis 7.10 per cent of the extant G-Sec of similar tenor.
Yields of G-Secs have thawed across tenors amid expectation of a repo rate cut in the December 2024 and February 2025 monetary policy reviews and foreign investors appetite for investing in the securities going up following their inclusion in the JP Morgan Emerging Market Bond index.
The weighted average yield of issuances during FY24 dropped marginally to 7.2 per cent from 7.3 per cent in FY23, according to RBI’s latest monetary policy report.
While repo rate has remained unchanged since it was last upped in February 2023 by 25 basis points (bps) to 6.50 per cent, yields of G-Secs have gradually thawed thereafter.
For example, yields of the 3-year and 5-year G-Secs have softened to 6.66 per cent as at September-end 2024 (from 7.07 per cent as at 2023 end) and 6.68 per cent (7.09 per cent), respectively. Yield of the 10-year G-Sec has declined to 6.75 per cent (7.18 per cent), per a report by SBI Funds Management.
New 10 year G sec
The Government will be auctioning a new 10-year G-Sec maturing in 2034 on October 4th as the outstanding stock in the currently traded G-Sec of similar maturity, which was issued on April 8, 2024, has reached ₹1.80 lakh crore.
Usually, when the outstanding stock in a 10-year G-Sec crosses ₹1.50 lakh crore the Government explores the possibility of floating a new paper.
Harsimran Sahni, EVP & Head – Treasury, Anand Rathi Global Finance, said the extant 10-year benchmark G-Sec was traded at 6.73 per cent level on Tuesday, whereas as the new 10-year G-Sec (which will be issued on Friday) was traded at 6.72 per cent in the “when issued” segment.
“When Issued” trading takes place between the time a G-Sec is announced for issuance and the time it is actually issued.
Sahni noted that generally in the past, yield of a new 10-year G-Sec has been 2-3 basis points lower than the currently traded 10-year benchmark.
Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, expects cut-yield (which will be fixed as the coupon rate) on the new 10-year G-Sec to be in the 6.70 per cent to 6.73 per cent range as there is a huge demand from domestic and foreign investors.