Buoyed by this demand, the Centre has comfortably elongated the maturity of its borrowings – thus helping it better manage debt repayment obligations. Moreover, the buying interest has brought about a fall in long-term sovereign bond yields, leading to softer borrowing costs across the economy.
An analysis of the government’s bond issuance calendar for October-March, released by the Reserve Bank of India last week, showed that the Centre is scheduled to borrow ₹2.5 lakh crore, or 37.8% of the total half-yearly sum, through securities maturing in 30, 40 and 50 years. In the issuance calendar for the second half of fiscal 2023-24, it had earmarked 34.4% of borrowing through bonds maturing in securities of such tenures.
“From duration perspective, the extreme long end of the yield curve (21-50Y segment) will do the heavy lifting, followed by its belly (6-10Y segment) with (an) around 32% share in issuances,” economists from QuanEco Research wrote. “The gap in the share of issuances between the long end and the belly of the curve is the widest on record … both these segments are expected to face healthy demand from FPIs and insurance companies/PFs respectively.”
Insurance companies, which are one of the traditional sources of demand for bonds maturing in 20 years and above, have stepped up their holdings of government debt since the Covid crisis. For insurers, new types of investment products offered by them have led to an increased need to hold long-term risk-free assets.The latest data released by the RBI showed that ownership of central government bonds by insurance companies was 26.1% of the outstanding stock in June 2024, second only to commercial banks. The total outstanding stock for the period under consideration was ₹109.47 lakh crore. In December 2019, the ownership of bonds by insurance companies was 24.9% of outstanding stock which was ₹65.13 lakh crore.Meanwhile, the ownership by pension funds – another source of demand for sovereign bonds – was at a record high of 4.74% of outstanding stock in June 2024. The prospect of a domestic monetary easing cycle commencing in the coming months was a key factor cited by pension funds for the interest in sovereign debt.”The view from us is that we’re expecting rates to come off and when you’re expecting rates to come off, you tend to be more present at the longer end because the longer your duration, the more you’re able to capture the marked-to-market gains better. That’s why you’ll find a lot of pension companies buying very long,” said Kurian Jose, chief executive officer of Tata Pension Fund.
Adding to the rush are foreign portfolio investors after inclusion of local debt in a JP Morgan index. From a holding of 2.7% of the outstanding stock of a 2053 maturity bond on March 28, FPI holding of the paper has shot up to 5.5% on September 27.