Centre sails through this fiscal's first borrowing of Rs 19,000 crore

The 10-year bond yields closed at 6.49%, which is more than 200 bps above the policy repo rate

The first borrowing for the fiscal year saw the Reserve Bank of India (RBI) paying higher coupon than the prevailing market rate as traders take position for a deluge of supply in the coming days.

The government borrowed Rs 19,000 crore from the markets. The full amount was subscribed.

The cut-off yield for the de-facto 10-year benchmark paper, which was used to raise Rs 10,000 crore, came at 6.53 per cent. The cut-off is six basis points higher than the prevailing yield, and about 22 basis points higher than what it was when the state government bond auctions happened on Tuesday. However, the cut-off yield for the 10-year was just two basis points above the consensus expectation, according to Bloomberg.

The 10-year bond yields closed at 6.49 per cent, which is more than 200 basis points above the policy repo rate.

Such a situation is extremely rare for the bond market, and the expectation now is that the Reserve Bank will come with some direct secondary market bond purchase announcement.

The government also raised Rs 6,000 crore through a 40 year maturity paper and Rs 3,000 crore through a paper maturing in two years. The bids were good enough in numbers, with the 10-year bonds receiving 290 bids.

“The cut-off was along expected lines. Till the lockdown continues, market interest will be limited. But in this period, if yields keep going higher, market sentiments will turn negative,” said Badrish Kullhalli, head of fixed income at HDFC Life Insurance.

“Markets are of course thin, and coming on the heels of the state government auction the higher yield was probably expected. Markets remain anxious of borrowing numbers especially if a large economic package is needed to get the economy going,” sad Harihar Krishnamurthy, head of treasury at First Rand Bank.

The market is closely watching the fiscal measures undertaken by the government to give relief to the economy under a lockdown.

“The stress in market is apparent, and though cut offs were near market expectation, the fiscal announcements towards relief measures in light of corona is testing the nerve of market,” said Gopal Tripathi, head of treasury at Jana Small Finance Bank.

States borrowed at 150-200 bps above G-Secs, or more than 450 bps above policy repo rate, to raise money from the markets.  Kerala paid 8.96 per cent for a 15-year bond on Tuesday, when the equivalent maturity government security closed at 6.92 per cent. The government has to borrow Rs 4.88 trillion in the first half in this environment.

In a measure that the banks want liquidity support, the targeted long term repo operation of the RBI received huge response. The central bank was auctioning Rs 25,000 crore of three year money. But the bids received amounted to Rs 113,470 crore. The money raised through the TLTRO is to be used specifically to buy corporate papers.  “It shows that the banks are not willing to invest their own money for these papers, and so are shifting the risk to the RBI,” said the head of treasury of a bank.

Rupee strengthened a little following cues from the equity market. The partially convertible currency closed at 76.28 a dollar, up from its previous close of 76.34 a dollar.