Sovereign bonds slide as RBI's choice of purchase papers disappoint

India’s sovereign bonds slumped as the Reserve Bank of India’s choice of relatively illiquid papers for its bond-purchase programme disappointed traders. Surging global oil prices also weighed on sentiment.

The yield on the 5.63 per cent bond maturing in 2026 rose as much as 13 basis points (bps) to 5.89 per cent, while the 6.64 per cent 2035 bond yield climbed 8 bps. The benchmark 10-year yield advanced nine basis points to 6.18 per cent, its biggest jump in nearly three months.

“The choice of illiquid papers has disappointed traders,” said Debendra Dash, head of fixed income at AU Small Finance Bank in Mumbai. “Traders were hoping the RBI will include the 5-year paper,” in the purchase list as it had asked underwriters to buy that paper.

Underwriters had to rescue nearly the entire Rs 11,000 crore ($1.5 billion) of the 5-year bond at last week’s sale.

The announcement of a new 10-year bond, which is likely to have a higher coupon, compared to 5.85 per cent for the current benchmark, also damped sentiments, traders said.

The central bank on Monday said it would buy Rs 20,000 crore of bonds as part of its Rs 1.2 trillion purchase plan for the July-September quarter. But the choice of papers was likely to help banks book profits, leaving traders with devolved stocks of previous auctions, said traders, who didn’t want to be named, as they are not authorised to speak publicly.

The surge in crude, which gained further after OPEC+ ended days of talks without a deal to bring back more halted output next month, will further heighten inflation worries in India. Bond yields and swap rates have been rising on fears that the central bank will need to tighten its policy tone as early as August and bring ahead policy normalization.

“The rise in crude prices will put further upward pressure on yields ahead of the monetary policy,” said Arvind Chari, chief investment officer at Quantum Advisors Pvt.

The government will sell Rs 26,000 crore of bonds Friday, including Rs 14,000 crore of a new 10-year bond, it said after trading hours Monday.