New 10 year bond auction devolves ahead of budget
Premium- The cut-off yield on the new 10 year came at around 6.54% in the auction. The paper closed at a discount of 6.56% while that on the current 2031 jumped two basis points to 6.58%.
Mumbai: The auction of the new 10 year benchmark rate failed to go through as the market asked for higher yields than what the Reserve Bank of India was comfortable offering. Of the ₹13,000 crore on offer on the new bond, the central bank made primary dealers or underwriters buy ₹5442 crore.
The cut-off yield on the new 10 year came at around 6.54% in the auction. The paper closed at a discount of 6.56% while that on the current 2031 jumped two basis points to 6.58%.
Dealers say underwriting commission of ₹13.80 was also too high for a new 10-year benchmark.
The devolvement of the new 10 year bond is a signal to the government to keep its borrowing program under check in the upcoming budget scheduled to be unveiled next month.
“The devolvement of the new 10 year bond is seen as RBI's discomfort with the current yield level, RBI could have been expecting a lower cut off yield. With budget round the corner and market expectation of bigger borrowing program from the government, will lead to further rise in yields. The government has to find ways to cap borrowing program at least at ₹12 trillion for yields to remain under check. Devolvement no way going to help in improving market sentiment," said Naveen Singh, head of trading, ICICI Securities Primary.
The yield on the 10 year G-Sec have been rising ever since the US Fed signalled a hawkish stance in December and RBI stepped up variable reverse repo rate (VRRR) auctions to suck out surplus liquidity from the banking system.
The auction devolvement will have an impact on other G-secs including state government bonds. The market is therefore expecting RBI to intervene in the market by buy bonds through the open market operations.
“RBI has stopped buying bonds from the market after the G-sec Acquisition Program (G-SAP) was withdrawn in September 2021. The market is now expecting RBI to buy atleast ₹50,000- ₹60,000 crore of bonds through OMO or GSAP to stabilise the yield, that has moved up nearly 30-40 basis points since then" said Gopal Tripathi, head of treasury, Jana Small Finance Bank.
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