Bond yields: Reliance buys G-secs, L&T halts surge in yields

Mumbai: Reliance Industries and Larsen & Toubro bought government bonds for ₹11,000 crore last week in the secondary market, people in the know have told ET. This helped halt the spike in bond yields, which also contributed to North Block’s record borrowing plan this fiscal year.

Sovereign paper maturing in five to 13 years likely changed hands as the two companies, with ample funds, likely sought higher rates than traditional pockets like term bank deposits.

While retail oil conglomerate RIL reportedly purchased sovereign papers for around ₹7,000 crore with relatively shorter tenors, engineering giant L&T may have racked up around ₹3,000-4,000 crore bonds at relatively more long term, the people said.

RIL and L&T did not respond to ET’s questions.

“The unexpected demand came into the market mostly between Monday and Wednesday last week, which in turn dampened the surge in yields,” one of the people said.

Earlier this month, the benchmark paper’s yield climbed as high as 7.29% after the monetary policy review.

It fell about 18 basis points on Wednesday, but rose again on Friday.


Return 6.91% before policy

It was then that the Reserve Bank of India, the government’s merchant banker, sold bonds worth ₹32,000 crore in a primary auction.

RBI’s monetary policy commentary on inflation had sent the yield higher too quickly. It was 6.91% before the policy. Bond yields rise when prices fall. A decline in yield would reduce the government’s cost of borrowing. “Buying select corporate treasuries was a blessing in disguise,” said a senior bond broker.

Some of the securities they purchased have residual maturities of five years, 10 years and 13 years, the dealers said. These bonds currently offer better yields than bank deposits. The country’s largest lender, the State Bank of India, offers 5.5% for deposits of five to ten years. Government bonds offer 6.77% at five years and 7.16% for benchmark securities at 10 years.

“There is currently an anomaly in the yield-interest rate structure,” said Joydeep Sen, an independent expert who worked for about three decades in financial institutions. “It makes sense to take advantage of it.”

The striking spread is between 127 and 166 basis points (one basis point equals 0.01 percentage point). This is quite attractive for a corporate house betting loose money. Even mutual funds that invest in government securities have posted negative returns of 0.73% year-to-date, according to data from ValueResearch.

“There may be an impact on the market value of this investment in companies’ income statements if return levels rise further, but over a long holding period things tend to balance out, with an accumulation coupons and a potential recovery at some point in the future,” the senator said.

Five-year paper maturing in 2027 carries a coupon of 8.24%, a high interest rate that is unlikely to be offered anytime soon.

RIL and L&T would have bought papers mainly from two large foreign banks.

In between, short-selling speculation was rife, with some market participants betting big on the intensity of yield increases. The government bond maturing in 2035 was considered the most short-sold security, for which short sellers must have a sufficient supply of bonds at the time of delivery.

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