Bond market gets new benchmark paper

The 6.05% paper expiring in January 2019 will become the new benchmark for the bond market, starting Monday. The Reserve Bank of India (RBI) said on Friday it had set a cut-off yield of 6.05% at the auction of the new 10-year security maturing in 2019.

The 10-year security has traditionally been the most liquid paper in the Indian bond market and is widely used by traders to take a view on interest rates. "There were aggressive bids that came in for the new bond," says RVS Shridhar, chief dealer with Axis Bank.

"Now, although there is a big difference of 25 bps between it and the old benchmark bond (which is now a 9-year paper), we expect this will adjust in coming days. While the new paper closed at the yield of 5.91%, the 8.24% paper due in April 2019 ended at 6.26%.

RBI's cut-off yield corresponds to a price of Rs 100, as the bond is being sold for the first time. The issue was fully subscribed. A Reuters poll earlier in the day had forecast the central bank selling the 2019 bondsat a cut-off of 6.06%. So, the auction as more or less on expected lines, said dealers.

Yields came off highs after the auction results on short-covering, as investors who were not allotted bonds started buying them back in the secondary market, dealers said.

At the close, the 10-year bond had risen 92 bps this month after falling 254 bps in 2008. It fell to a record low of 4.86% earlier this month after a hefty rate cut by RBI.

The 6.05% paper will be under increasing spotlight in the coming days as analysts say higher government spending and a revenue shortfall due to an economic slowdown will strain government finances, pushing up borrowing.of these extra bonds may keep the pressure on bond yields despite a series of aggressive rate cuts by the central bank, dealers say.