As market yields rise, premium of sovereign green bond slightly narrows

The cut-off yield for the five-year green bond was set at 7.23% while that for the 10-year green bond was set at 7.30%

The second sale of the government’s sovereign green bonds saw its premium – or ‘greenium’ – narrow slightly compared to regular government bonds, as market sentiment weakened after the Reserve Bank of India’s (RBI) policy statement.

The Centre on Thursday sold Rs 8,000 crore worth of two green bonds – Rs 4,000 crore of a five-year green bond and Rs 4,000 crore of a 10-year green bond. Following Thursday’s auction, the Centre has successfully completed the Rs 16,000 crore worth of green bond issuances that were earmarked for the current financial year.

The cut-off yield for the five-year green bond was set at 7.23 per cent while that for the 10-year green bond was set at 7.30 per cent.

On Thursday, yield on the most liquid five-year bond closed at 7.25 per cent while the 10-year benchmark bond closed at 7.34 per cent. Consequently, the premium of the green bonds relative to the regular bonds of comparable maturity stands at 2 basis points and 4 basis points, for the five-year and ten-year papers, respectively.

This is a narrower premium – or pricing advantage for the government – than that which emerged after the maiden auction of green bonds on January 25. The premium that the two green bonds commanded, relative to the regular bonds at that auction, was 5-6 basis points.

Globally, green bonds are issued at a premium as the instrument is meant to facilitate access to cheaper capital for environment-friendly projects. A premium refers to a lower yield or lower return, and in turn, higher price on a debt instrument.

“The premium has narrowed from six basis points to four basis points for the 10-year sovereign green bond. Market yields have also gone up, so that will have some effect on demand. Moreover, the issuance of green bonds is very new, so it needs some time for the ecosystem of investors to develop the way it has in global markets,” Naveen Singh, head of trading, ICICI Security Primary Dealership, said.

The government bond yields hardened on Wednesday as traders who were looking for a concrete sign of a pause in interest rate hikes were left disappointed.

The sharp rise in the cut-off yield in the five-year paper at Thursday’s auction vis-à-vis the maiden auction reflects the movement of the regular five-year bond yield in the secondary market.

Bond yields rose across the board but the rise in yields was sharper for short-term securities, which are more sensitive to interest rate expectations. Yield on the most liquid five-year bond rose seven basis points, surpassing the three-basis-point rise in the 10-year bond yield. This has led to a flatter sovereign bond yield curve.

“An important thing to see is that the difference between the 5-year and 10-year bond yield has also come down. For example, the 10-year bond is at 7.34 per cent, while the five-year is at 7.25 per cent. Compared to the last time, there has been a slight rise in the 5-year point. Keeping all this in mind, the response was good for the sovereign green bond,” B. Raghavendra Rao, deputy managing director, State Bank of India, said.