PSU banks are rushing to sell long-term bonds to exploit relatively cheaper interest rates and a revival in demand for such papers from large insurance and pension firms.

Also, a record government borrowing plan and a likely pick-up in economic activity towards the end of the present financial year that ends March 2010 may dent investor demand.

PSU banks have raised at least Rs 50 billion via bo­nds so far this month, wi­th major issuers being the St­ate Bank of India and Co­rporation Bank, after ra­ising about Rs 4,000 th­rough June and July.

“Banks are finding the present rates opportunistic to borrow long-term fun-ds,” said Paritosh Kashyap, executive vice-president at Kotak Mahindra Bank.

The Central Board of Trustees, a government-run pension firm, typically la­ps up perpetual paper while insurance companies and banks invest in upper and lower tier-II bonds.

Life Insurance Corporation of India (LIC) has set aside Rs 50,000 crore for corporate bond purchases this financial year and bankers say the State Bank of India is also planning to increase purchases of bank-issued paper.

In June and July, insurance and pension companies had stopped buying these bonds as they were unsure about the government's borrowing plans but a lack of attractive corporate paper in recent weeks has forced them to look at bank bonds.

However, demand for such paper is thinning among other banks and merchant bankers said with even the central bank finding it difficult to place federal bonds, it is only a matter of time before yields in the primary market start to harden.

The 10-year benchmark government bond yield rose to 7.38 per cent on Monday, its highest in more than nine months, taking the rise so far this month to 38 basis points.

At Rs 12,000 crore federal bond auction last week, primary dealers, underwriters to the auction, had to buy part of the offer as investors bought the bonds at lower-than-expected prices.

Bankers said many banks that typically snap up these papers are reaching the limit for their hold-to-maturity (HTM) portfolios and a glut of bond issu­ances will force them to buy the instruments as av­ailable-for-sale (AFS), whi­ch is subject to mark-to-market risks.

“So liquidity is plenty but yields should be competitive and banks and other organisations should be able to takes these on their books, so we might as well issue when we have the opportunity,” said a treasury official with a government-run bank.