RBI to auction floating rate bonds on Dec 18

Bond yields may ease slightly on Monday following the Reserve Bank of India’s (RBI) announcement that it will auction Rs 2,000 crore of floating-rate bonds (FRBs). The 11-year bonds will be auctioned on December 18.

“This move will have a beneficial impact and yields might ease by 3-5 basis points on Monday,” said GA Tadas, chief executive officer of IDBI Gilts, adding the gains could be offset by the wholesale price index (WPI) data. However, the relief might be short-lived as unfavorable wholesale price inflation (WPI) numbers, which are expected to be released on Monday morning, might push yields up again, bond dealers said.

Interest rate on FRBs is pegged to benchmark such as the 10-year government bond and adjusted periodically.

The interest rate on FRBs will be firmed up taking the average of the implicit yields at cut-off prices of last three auctions of 182-day treasury bills. The reset and payment of variable coupons will be made on a semi-annual basis. The coupon rate for payment of interest for the first half year ending June 20, 2010, will be 3.79 per cent.

On Friday, the yield on the 10-year securities maturing 2019 touched an intra-day high of 7.70 per cent, as against its previous close of 7.51 per cent. At the close of trading, the yield was 7.58 per cent, the highest closing level since the paper began trading in July.

“The announcement is well-timed since we have seen yields shoot up in recent weeks. So with floating rate bonds, you are putting less fixed-income risk into the market,” said the treasury head of a private sector bank.

“However, the relief will be low since the auction size is quite small. Bond prices might move up by 5-10 paise on Monday,” he added. Bond yields have gone up for three weeks in a row. During the current week, yields fell 17 basis points from last Friday’s close of 7.41 per cent.

Higher bond yields, or lower prices, mean that banks will have to lower the value of the bond portfolio as they have to follow the mark-to-market (MTM) accounting practice.