Insurers, pension funds scramble for a share of the 50-year bond pie

The central bank received a total of 216 bids, majority of which were from insurance companies and pension funds. The sale of long-term bonds may help the government elongate the tenure of debt sold and keep its interest costs under control

The government’s auction of the first 50-year bond evoked a strong demand from investors on Friday as the Reserve Bank of India (RBI) received bids worth Rs 40,200 crore for these ultra-long bonds, against the notified amount of Rs 10,000 crore.

The RBI set a coupon rate of 7.46 per cent on the new government security maturing in 2073 during the weekly bond auction.

Talking to Bizz Buzz, Ajay Manglunia, Managing Director and head of Investment-Grade Group at JM Financial, says, “Even though the cut-off yield for the 50-year bond is somewhere similar to that of the 30-year bond, many long-term investors like insurers and pension funds, which have long-term liabilities, would love to invest in it as they will have 20 more years of investment at the same yield.”

India’s longest tenor government bond was the 40-year paper for which the cut-off yield is at 7.47 per cent. The yield on 30-year paper is at 7.46 per cent.

Experts expect these ultra-long-term bonds to become a regular feature in the government’s borrowing programme.

The government had earlier announced plans to sell Rs 30,000 crore of the 50-year bond in the October-February period.

Anil Kumar Bhansali, Head of Treasury and Executive Director, Finrex Treasury Advisors, The Government's first auction of 50 years for the year 2073 met with overwhelming success as Insurance and Pension funds grabbed the 100 billion as planned at cut-off 7.46 per cent yield as against 7.48 per cent in Bloomberg survey.”

Indian yield curve has been generally flat despite record borrowings by the Government. With, oversubscription it is expected that RBI will come out with more issues. Sale of long term bonds elongated the tenure of debt sold and keeps the interest cost under control. The government is trying to elongate its average maturity, he said.

According to Bhansali, “The government plans to sell 3000 crore of 50-year bond from October-February. Insurance companies have a lot of interest in this long duration papers for their asset-liability management. By issuing the 50-year bond, the Union Government will have long-term stability in investments.”

The central bank received 216 bids, a majority of which were from insurance companies and pension funds.

The sale of long-term bonds may help the government elongate the tenure of debt sold and keep its interest costs under control. Over one-third of the government’s fiscal second-half bond supply is in papers maturing in 30-50 years. The RBI had in September said it planned to add the 50-year bond in response to market demand for ultra-long papers, extending the nation’s yield curve.

The government plans to raise Rs 6.55 trillion in the second half of the current financial year as part of its stated borrowing plan. The 50-year bond will be used to raise 4.58 per cent of this target, the government had disclosed in September.