Government bond yields rise sharply

The yield on government securities (g-secs) shot up across tenures after the Reserve Bank of India (RBI) accepted bids for bonds at higher cut-off levels, increasing the government’s borrowing costs.

Yields on the benchmark paper to mature 2019 surged to a nine-month high after RBI sold the paper (Rs 5,000 crore) at a yield of 7.30 per cent against 7.25 per cent forecast by investors, dealers said.

The yield on the 6.90 2016 paper closed 13 basis points up at 7.31 per cent, according to RBI’s negotiated dealing system data.

Primary dealers had to buy unsold debt at an auction, signalling that demand for the securities had weakened. These dealers, who underwrite the government debt auction, bought unsold 10-year bonds worth Rs 321 crore. RBI also sold bonds maturing in 2015 and 2027 at higher-than-expected yields.

Last week, the government had rejected bids for bind auction, though it did not assign any reason for its decision. “Perhaps, RBI wanted to send a signal to the market that it did not approve of aggressive bidding,” said a treasury executive with a public sector bank.

Such high yields at an auction and purchases by underwriters indicated that the decline in demand, particularly from state-owned banks that are typically the biggest investors, had been sharper than expected, said the head of treasury with a public sector bond house.

Dealers said while yields had been hardening for many weeks, the auction results pushed them up further. The market had factored in the government’s higher borrowing plan, rising inflation and partly the adverse effect of delayed monsoon, they added. The government plans to raise Rs 4,51,000 crore in the current financial year ending to bridge a widening budget deficit.

The hardening of yield on government papers might force companies to increase the coupon (interest rate) on instruments like debentures. They may have to revise the coupon by 50-75 basis points for companies planning long-term funds, said the head of treasury with a private bank. Meanwhile, RBI has said that it will hold an auction on August 28 for bonds worth Rs 12,000 crore.