Within a fortnight of its issuance, a portion of the benchmark 10-year bond remained unsold in Friday’s auction with traders demanding higher yield.
The RBI planned to sell Rs 30,000 crore through four bonds, including Rs 18,000 crore of the new 10-year bonds. However, Rs 4637.93 crore of the planned amount remained unsold. The cut-off yield in the auction of this bond came at 5.96 per cent, against its coupon of 5.77 per cent. The bond was launched a fortnight back and replaced another 10-year bond that was the benchmark for just three months. Generally, the government retires a bond after raising more than a Rs 1 trillion through it.
Going by the same logic, the new 10-year bond could be retired soon too, and that explains the reason why the traders wanted a higher yield to compensate for the future 'illiquidity premium', said a senior bond trader requesting anonymity.
“The 10-year is not the 10-year anymore,” said the trader, indicating that the prestige of the benchmark bond may have diminished in an extraordinary year where the government is borrowing a record Rs 12 trillion to bridge its deficits. The government had originally planned to borrow Rs 7.8 trillion in the fiscal, but the Covid-19 induced lockdown and the ensuing economic slowdown has upset government finances. Recently released data showed the Centre’s fiscal deficit for the thirst three months of FY21 stood at Rs 6.62 trillion, which is 83 per cent of the budgeted target for the year.
“The bond market is now getting aligned with the new reality of elevated inflation, rising global yields, and a rate pause by the RBI. To add to it, the impact of sustained outbreaks is yet to be taken into consideration,” said Soumyajit Niyogi, associate director at Indian Ratings and Research.
The central bank managed to sell the rest of the bonds as planned, including Rs 5,000 crore of a 40-year bond.
“There are very few countries in the world where the inflation numbers exceed 10-year yields. That can only sustain if people genuinely believe inflation will collapse, but that doesn’t seem to be happening and chances of rate cuts are also thin," said Harihar Krishnamurthy, head of treasury at First Rand Bank.
"The yields can come down if the RBI announces open market operations (OMO) calendar to buy massive amount of bonds from the market,” Krishnamurthy said.
Bond traders say the RBI is trying to keep bond yields soft so that the government can borrow more. But the market would want higher interest rates on their investment. Otherwise, there could be a bond market ‘strike’.
“At this point, the direct monetization is the safest way out to manage the borrowing programme. The market is near certain that extra borrowing will come at the end, and if yields are low now, they will surely rise in a few months without monetization and rate cut support. Who would want to buy bonds in this environment?” said the anonymous bond trader quoted above.