Investors have been increasingly calling on India to reduce supply of long-term government bonds maturing in 30 years and above, which make up one-third of New Delhi's borrowing needs, as tepid demand pushes up their yields.
Large investors, such as insurers and pension funds, have slowed investments, pushing up the gap between yields on the benchmark 10-year and long-term bonds, to a four-year high of around 80 basis points (bps).
“Long bonds have significantly underperformed the market during the current financial year,” said Ketan Parikh, head of fixed income at ICICI Prudential Life Insurance.
While the 10-year benchmark bond yield is down 30 bps this fiscal year, the long yields are up 15 bps.
Insurance companies, which own more than one-fourth of India's government bonds, according to RBI data, have not been very active in the market due to a slowdown in premium inflows over the last three months.
Demand from pension funds has also been significantly low, said Parikh.
India aims to borrow ₹2.7 lakh crore through sale of ultra-long bonds in the first six months of this financial year.
Investors are now concerned about the hefty supply.
“It is becoming difficult for insurance, pension funds to absorb the current level of 30-year-plus government bond supply,” said Rahul Bhuskute, CIO at Bharti AXA Life Insurance.
“From a demand-supply perspective, we would recommend a tweak in the borrowing calendar.”
While long-bond yields have shot up, those on bonds that mature within seven years and make up about one-fourth of the government's borrowing, have declined amid aggressive purchases by the central bank.
The bond market has "good" appetite to absorb supply of up to seven years, but is skeptical of running duration risk, said Sachin Bajaj, executive vice president and chief investment officer, Axis Max Life Insurance.
“Remedial measures can be in terms of reduction in supply of long-term government bond auctions,” he said.