Low availability of paper, rising interest rate dampen mood in bond market

RBI has issued just Rs 28,000 cr worth of 10-year bonds, cancelling a Rs 14,000 cr auction last Friday in a move being seen as intervention, which bond dealers say did not go well last time

Low availability of bonds and rising interest rate has again made the 10-year bond thinly traded in the market, shifting the market interest to other benchmarks.

The Reserve Bank of India (RBI) has issued just Rs 28,000 crore of this paper, cancelling a Rs 14,000 crore auction last Friday. Refusal to sell the bond on Friday’s auction is being interpreted as intervention in the 10-year segment, which the bond dealers say did not go well last time.

The RBI had bought most of the last benchmark from the market, hoping to keep the yields contained. However, the market made the five-year and the 14-year bonds as the most traded, staying away from the 10-year segment altogether.

Banks too are not showing interest in the bond market for multiple reasons. One being that they are over-invested already. Against their mandatory investment limit of 18 per cent of the deposit book, banks’ investment is about 30 per cent. The deposit growth in the banking industry is 10.7 per cent year-on-year, not fast enough to open up space for fresh bonds. However, the supply continues uninterrupted.

Bond dealers also say the pricing on the 10-year is not reflecting the market realities, and it would be difficult for the RBI to sell the bonds at the yields it prefers.

The 14-year bond was the most traded on Tuesday. The yield on this closed at 6.88 per cent. The 10-year bond yield closed at 6.23 per cent. The difference in yield between the two, for a four years period, is 65 basis points. One basis point is a hundredth of a percentage point.

“The term premium for each year should be a maximum of 10 basis points. So, the difference can be, at best, 40 bps. That would mean that the 10-year yield ideally should be 25 basis points more, or the 14-year bond yield should be 25 basis points less. That is not the case, pointing to some asymmetry in the yield curve,” said a senior bond trader, without wanting to be quoted.

Going by that logic, the difference in tenure premium between the 5-year bond and the 10-year bond is just about right. The 5-year bond closed at 5.74 per cent. The yield difference between the two works out to be 49 basis points.

Therefore, the 14-year bond yields are at a higher level, and ideally the RBI intervention should be on that segment, if it wants “orderly evolution of yield curve,” as senior RBI officials stress.

“If the RBI is not comfortable with the spike in 10-year yield, they will have to compensate for the borrowing through other segments of the yield curve. Though higher supplies of the shorter end are getting absorbed by abundant system liquidity, higher borrowing through the longer end of the curve is putting further pressure on the already stretched demand supply equation. As a result, a steep yield curve is witnessed for quite some time,” said Ram Kamal Samanta, vice president, investments, at Star Union Dai-Ichi Life Insurance.
 

Overall, there is a lack of demand in the market. The RBI has acknowledged some of those realities by letting the 10-year bond rise to its present level, from its insistence to keep the yields low at 6 per cent a month back.

“There is not much interest in the market at the present levels,” said Anand Bagri, head of domestic market at RBL Bank.

“The interest rate view is upwards. Everybody is in losses, driving trading volume low,” said Debendra Dash, senior vice president at AU SFB.