The cut-off yield at the upcoming auction of the new 10-year government security (GS) could be almost 10 basis points lower than the yield on the extant benchmark security, say market players.

They reason that softening retail inflation and lower factory output could prompt the Reserve Bank of India to cut the policy rate in its second bi-monthly policy statement on June 2, leading to thaw in the yields of government securities in the secondary market.

The current benchmark (10-year) GS, which has a coupon rate of 8.40 per cent and matures in 2024, closed at a lower yield of 7.86 per cent (price: ₹103.48) on Tuesday as against the previous close of 7.90 per cent (₹103.20) on hopes of a rate cut. The yield of a bond is inversely related to its price.

Going by market expectations, the cut-off yield on the new 10-year GS, which will replace the 8.40 per cent GS 2024 as the benchmark security, could come in at about 7.75 per cent. The cut-off yield will be the coupon rate for the new security.

The government plans to mop up ₹16,000 crore through auction of four dated securities, including the new 10 year GS, on May 22. A GS is a tradable instrument issued by the Central Government or the State Governments. It acknowledges the Government’s debt obligation.

It intends to raise ₹9,000 crore through the new security, ₹2,000 crore each through GS maturing in 2033 and 2044, and ₹3,000 crore via GS 2023.

“Market participants will aggressively bid for the new 10 year GS as the auction comes in the run up to the RBI’s second bi-monthly policy statement,” said the treasury head of a private sector bank.

The 10-year dated security is called as the benchmark security as financial market transactions such as corporate bonds, floating rate bonds, and interest rate futures are pegged to it.

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