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    LIC buys over Rs 8,000 crore of state bonds

    Synopsis

    Insurer goes slow in buying corporate bonds after a series of rating downgrades for borrowers.

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    The insurer has significantly reduced buying corporate bonds after a series of rating downgrades for borrowers, said one of the persons cited above.

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    Mumbai: LIC of India, the country’s biggest buyer of debt, is said to have invested more than Rs 8,000 crore in state government bonds this week ahead of a likely decline in yields.

    The investment has helped LIC earn at least 60 basis points more than the benchmark yield for such papers, multiple market sources said.

    A basis point is one hundredth of a percentage point.

    Among multiple bidders, only LIC outbid others in the competitive auction segment. LIC didn’t respond to ET’s queries until the publication of this report. LIC’s investment book in FY19 was around Rs 25 lakh crore.

    Jammu & Kashmir, Maharashtra, Madhya Pradesh, Rajasthan, Andhra Pradesh, Kerala, Tamil Nadu, Punjab, and Sikkim raised Rs 8,366 crore collectively on Monday. A small section of the entire sum, pegged at Rs 274 crore, was allocated to non-competitive or individual bidders.

    The Reserve Bank of India (RBI) is expected to lower the cost of funds this week, setting the stage for lower debt returns. Global yields have also trended lower amid signs of uneven growth.

    The central bank conducted the auction process for these debt securities known as State Development Loans. Those papers are treated almost on a par with sovereign debt.

    The bonds yielded about 7.6 per cent.

    The insurer has significantly reduced buying corporate bonds after a series of rating downgrades for borrowers, said one of the persons cited above.

    “Instead, it is focusing more on state government bonds with slipping sovereign bond yields,” the person said, requesting anonymity.

    Since September last year, bond buyers are seeking safe instruments after the IL&FS defaults.

    The spread, or differential, between the benchmark bond yield and similar maturity state government papers is now in the range of 60-70 basis points, compared with 85-90 bps during Jan-March earlier this year.

    “Although secondary SDL yields are about 10 basis points higher, LIC typically buys from the primary market,” said another market source.

    LIC invests mostly in longterm, top quality instruments.

    Six out of nine state bonds have 10-year maturities, while the rest would be up for redemption in 11, 12 and 13 years, respectively.

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