Why the Outgoing 15-Year Benchmark Gilt Is the Market’s Hottest Bond

Outgoing benchmark bonds usually lose traders’ attention as the market shifts to their successors. The 6.68% 2040 gilt is bucking that trend, drawing strong interest even as it prepares to surrender benchmark status. 

The current benchmark 15-year government bond has emerged as the market's preferred trading instrument, with foreign portfolio investors accumulating the paper while domestic traders build tactical short positions ahead of the launch of a new benchmark security.

The 6.68%, 2040 bond has attracted the one of the heaviest activity among benchmark securities over the past week as investors position for two near-term events—the expected announcement on India's inclusion in the Bloomberg Global Aggregate Index by month-end and Friday's auction of a new 15-year benchmark.

Since July 15, foreign investors have bought around ₹15.4 billion of the bond, compared with around ₹10 billion of the benchmark five-year paper, according to Clearing Corp of India Ltd data. The 2040 bond also became eligible under the Fully Accessible Route following the Reserve Bank of India's recent policy measures, further improving its appeal for overseas investors.

Dealers said foreign investors are reluctant to stay away from one of the market's most liquid securities ahead of a potential Bloomberg index announcement, even though the bond is set to lose its benchmark status after the new 2041 security is auctioned.

The steady overseas demand has, however, been matched by domestic traders using the bond to execute relative-value trades rather than outright bullish bets. The spread between the benchmark 10-year and 15-year bonds has remained broadly unchanged at 22-25 basis points despite sustained foreign buying, suggesting positioning rather than valuation has driven the activity.

Market participants said many traders have been shorting the 2040 paper while simultaneously switching into longer-duration securities, particularly the 30-year segment, where the yield spread over the 15-year benchmark remains around 44 basis points. The strategy allows investors to benefit from the benchmark transition while maintaining duration exposure.

This positioning is also evident in the special repo market, where the 6.68%, 2040 bond has consistently recorded the largest outstanding short positions among on-the-run government securities, with borrowings hovering between ₹85 billion and ₹95 billion in recent sessions.

Traders expect many of these shorts to be covered through Friday's auction of the new 2041 bond. The fresh supply is likely to provide traders with the paper needed to unwind existing positions and shift liquidity into the new benchmark over the coming weeks.

Until then, the outgoing 15-year benchmark is expected to remain the market's preferred trading vehicle, with foreign investors positioning for a possible Bloomberg inclusion while domestic participants use the bond as the primary instrument for benchmark-switch and curve-positioning trades.