20-Yr Paper May Devolve 50%, 10-Yr To Sail Through

The auction of the Rs 2,000 crore worth 8.35 per cent government paper maturing in 2022 to be conducted tomorrow is likely to face devolvement as there is hardly any takers for long-term papers at this moment.

According to money market dealers, the devolvement will be to the extent of 35-50 per cent.

However, the other paper to be auctioned tomorrow -- Rs 4,000 crore of 7.40 per cent 2012 -- is expected to receive full subscription.

With tomorrow's twin auction, the central government will complete 54 per cent (Rs 37,000 crore) of the scheduled borrowing programme of Rs 68,000 crore for the first half of the financial year.

According to money market dealers, the cut-off yield for the 20-year paper should be around 8.50 per cent.

The unattractiveness of the paper was reflected in today's market as it was hardly been quoted by any market participants. The cut-off yield of the 7.40 per cent 2012 paper is expected to be in the 7.72-7.76 per cent band. The yield of this paper was at 7.69 per cent today.

The treasury head at a private bank said: "Nobody is interested to take position in a paper with more than 10-year maturity. Insurance companies, especially the Life Insurance Corporation of India, is also not buying the papers and hence we expect the devolvement," a primary dealer added.

Government paper yields increased by 8-12 basis points at the longer end of the market today in reaction to the auction announcement.

Dealers said that most of the market participants were creating space for tomorrow's auction. According to them, the market will remain dull even tomorrow, but the yields will dip once again on Thursday after the auction.