~30K-cr bonds to be converted into longer tenure debt papers

The government will be converting a bond maturing this year worth ~30,000 crore i nto longer tenure bonds, including one t hat matures i n 40 years.

The Reserve Bank of India (RBI) will be conducting the auction on May 18, it said on its website.

The central bank notified it will be switching the bond maturing in June this year in favour of three bonds maturing in 2024, 2030, and 2060.

The government will use 2024 bonds to switch ~13,000 crore, 2030 for ~13,000 crore, and ~4,000 for the 40 -year paper.

While such switching is fairly common, converting bonds maturing in a few months into bonds as long as 40 years have never hap - pened. Technically, this is opposite of Operation Twist that the central bank undertakes, in which it buys longterm bonds, selling an equivalent amount of short-term bonds.

The RBI’S actions enable long-term yields to come down, so that the government can borrow cheaply. However, the switch, in this case, will push up yields, as the market will deem it as almost an addition to the existing borrowing plan.

In terms of interest outgo, the government’s cost goes up as the market will adjust for tenure premium. Still, the yields are relatively low now and that may have encouraged the government to lock in the rates for as long as 40 years, said a bond dealer.

The 40-year paper is not a new instrument and is regularly used in the borrowing programme. The first such paper was issued in 2015, against which the government raised ~1 trillion. The volume outstanding i n a paper maturing in 2059 is ~83,461.952 crore. The one which is being used for the current switch has an outstanding volume of ~15,000 crore. It was first issued as part of the first borrowing programme for t he current fiscal year. Such conversions, typically done in the first half of the fiscal year, happen to enable the government to repay loans at a later date to ease stress on the exchequer. The switching also increases volumes in the already issued long-term securities and enables further secondary market liquidity.

The government will use 2024 bonds to switch ~13,000 crore, 2030 for ~13,000 crore, and ~4,000 for the 40-year paper