Mumbai: Indian state-run banks are rushing to sell long-term bonds to exploit relatively cheaper interest rates and a revival in demand for such paper from large insurance and and pension firms.
Also, a record government borrowing plan and a likely pick-up in economic activity towards the end of the current fiscal year that ends March 2010 may dent investor demand.
The banks have raised at least Rs50 billion via bonds so far this month, with major issuers being State Bank of India (SBI) and Corporation Bank, after raising about Rs40 billion through June and July.
“Banks are finding the current rates opportunistic to borrow long-term funds,” said Paritosh Kashyap, executive vice president at Kotak Mahindra Bank.
The central board of trustees, a state-run pension firm, typically laps up perpetual paper while insurance companies and banks invest in upper and lower Tier-II bonds.
Life Insurance Corporation of India has set aside Rs500 billion for corporate bond purchases this fiscal year, and bankers say SBI is also planning to increase purchases of bank-issued paper.
In June and July, insurance and pension companies had stopped buying these bonds as they were unsure about the government’s borrowing plans but a lack of attractive corporate paper in recent weeks has forced them to look at bank bonds.
However, demand for such paper is thinning among other banks and merchant bankers said with even the central bank finding it difficult to place federal bonds, it is only a matter of time before yields in the primary market start to harden.
The 10 year benchmark government bond yield rose to 7.38% on Monday, its highest in more than nine months, taking the rise so far this month to 38 basis points.
At a Rs120 billion federal bond auction last week, primary dealers, underwriters to the auction, had to buy part of the offer as investors bought the bonds at lower-than-expected prices.
Bankers said many banks which typically snap up these papers are reaching the limit for their hold-to-maturity (HTM) portfolios and a glut of bond issuances will force them to buy the instruments as available-for-sale (AFS), which is subject to mark-to-market risks.
“So liquidity is plenty but yields should be competitive and banks and other organisations should be able to takes these on their books, so we might as well issue when we have the opportunity,” said a treasury official with a state-run bank.