Twin Auction May See 100% Subscription

The twin auction of the 10.71 per cent paper maturing in 2016 and the eight-year floating rate paper (Rs 3,000 crore each) to be conducted tomorrow is likely to be oversubscribed by more than 100 per cent on the back of easy liquidity in the money market.

According to money market dealers, while the eight-year floating rate paper will receive good response from banks as it can be used to hedge interest rate risk, the fund-rich insurance companies will go for the 10.71 per cent 2016 paper.

The liquidity condition in the money market was reflected in the government security market where the yields touched new lows. The yield of the 10-year paper dipped to 7.76 per cent (7.81 per cent), while that on the 15-year paper dropped to 8.10 per cent (8.16 per cent).

The treasury head at a private sector bank said: "There is enough liquidity in the market and it has been reflected in today's repo auction where there was an outflow of Rs 12,070 crore. In a situation like ,this Rs 6,000 crore is too small an amount."

Dealers said that the cut-off yield for the 15-year paper will be close to the market yield, while the cut-off for the eight-year floating rate paper will be 5-10 basis points lower. Dealers even see a negative cut-off spread for the eight-year paper.

For the floating rate paper, the auction will be conducted to determine the spread over the variable base rate. The base rate will be reset after every six months and will be determined as the average rate of the implicit yield at the cut-off price in the immediate previous six auctions of 364-day treasury bills. For the first six-months starting on December 6 the, base rate will be 6.99 per cent.