Bond sale devolves despite OMO announcement

Yields on government bonds ended, as the Reserve Bank of India (RBI) devolved on Friday the auction of the new ten-year paper on primary dealers. Yields on the bond closed at 8.84 per cent — 4 basis points up from previous day’s close.

The central bank auctioned Rs 13,000 crore of dated securities, including Rs 6,000 crore, in the new ten-year paper on Friday. There was devolvement of Rs 1,150 crore on primary dealers in the auction, as traders asked for higher yields. The RBI, however, decided to cut off at 8.83 per cent.

That, experts say, has been a prudent move. “It would have sent out a wrong signal if RBI decided to cut off at higher yields even after announcing bond purchase,” notes Moses Harding, head of ALCO and Economic & Market Research, IndusInd Bank. The central bank will be conducting auctions on November 24 to purchase government bonds worth Rs 10,000 crore through open market operations.

Pressure from recovery in US Treasuries also weighed on the bond yields here. The yields on the benchmark 10-year US Treasury note rose to 1.99 per cent from an intra-day low of 1.95 per cent.

This week, two important measures were announced in order to cool off yields from three-year-high levels. Bond purchase by RBI and government’s decision to raise the foreign investment ceiling by $5 billion in government debt was expected to soothe rising yields.

Taimur Baig and Kaushik Das, economists at Deutsche Bank, say the increase of FII limit in debt will likely improve the outlook for portfolio investment flows, especially given that FII investment in equities remains weak. “Of course, this is another positive for government bonds,” Das adds.

However, this also increases the risk of interest-rate volatility. As a treasury official with a large public sector bank says, deteriorating fiscal condition may prompt foreign institutional investors to exit if there is another rating downgrade or change in outlook. “This will lead to volatility in interest rates. This is not good for the system when yields are already ruling high,” he adds.

The government will borrow Rs 2.2 lakh crore from the debt market — higher by Rs 52,800 crore than planned earlier for the second half of current financial year.