Market favourite

In the Government Securities (G-Sec) market, whenever a new 10-year benchmark G-Sec is issued, it becomes the market favourite, and the market participants routinely go after that security. The demand for any newly announced 10-year benchmark G-Sec is so high that the bidders in the primary market auction bid as much as about 30 to 60 basis points (bps) less than the prevailing market yield for papers having similar maturities. For example, 6.79 percent GS 2027 was issued at 56 bps lower yield; 7.17 percent GS 2028 was issued at 38 bps lower yield; 7.26 percent GS 2029 was issued at 32 bps lower yield. Subsequent secondary market trades also maintain that difference. The high demand in the primary and secondary market is because the market is expecting the paper to be reissued several times and be ultra-liquid in the secondary market, thereby offering very good trading opportunity. Through higher trading activities, every market participant is expecting a higher trading profit. Because of this expectation, the yield to maturity (YTM) of the paper is compromised. However, detailed analysis of the past trade data reveal that the initial yield difference of about 40 bps will be going on narrowing in a short period of about 10 to 12 months (active life) by which time a new 10 year benchmark security will be issued and the yield of the old 10 year benchmark security will fall in line with other securities having similar maturities.

Aggressive bidding

By accepting a yield which is about 40 bps lower, the investor is going to get 40 bps lower yield for the next ten years. But, this worry will be only for those market participants who are going to hold the security till maturity and not for the traders who trade without the intention of holding the security. So, those market participants like insurance companies and some banks who intend to hold the security till maturity do not have any valid reason to bid for the new 10-year benchmark security at lower yield when securities having similar residual maturities are available at higher yields. At best, the new security can be considered for long term buying only when its yield matches the yield of other securities having similar residual maturities.