Five-year G-sec yield spikes 22 bps in 3 days on VRRR auction fears

Bond market spooked by fears of potential VRRR auction as 5-year G-sec sees steepest 3-day spike in yields since 2022, amid uncertainty on RBI's liquidity stance

The five-year government bond yield spiked 22 basis points in the last three trading sessions as fears of a potential variable rate reverse repo (VRRR) auction weighed on sentiment, said market participants.

 

It posted its weakest three-day performance in more than two years, with the yield on the short-term benchmark rising by 22 basis points over the last three trading sessions — the highest since 16 September 2022.

 

The yield on the five-year bond settled at 6.05 per cent on Thursday against the previous close of 6.06 per cent. The benchmark 10-year yield settled at 6.34 per cent, against 6.37 per cent on Wednesday.

 

“There is speculation about RBI conducting a VRRR auction, which is being reflected in the short term,” said a dealer at a primary dealership. “I see the five-year bond yield moving up by another 10 basis points,” the person added.

 

A segment of the market believes that a VRRR auction may be conducted to align overnight rates with the repo rate; however, another segment believes this move would contradict the RBI’s goal of liquidity infusion and rate transmission. 

 

The weighted average call rate settled at 5.29 per cent on Thursday. The repo rate currently stands at 5.50 per cent.

 

They further said that scheduled outflows like advance tax and GST payments already tighten liquidity, making a VRRR auction unnecessary.

 

“Why would you want to artificially just push up the overnight rate? Let it find a natural level. If you have done one bit of activity and the market is surplus because there is no credit off-take, let it find its natural level,” said the treasury head at a private bank. “On one side, the governor wants to infuse liquidity, wants transmission to happen. I am not too sure why they would want to do this suddenly,” he added.

 

The net liquidity in the banking system was in a surplus of ₹2.57 trillion. The RBI has cancelled the planned VRRR auctions, but market panic persisted, leading to broad sell-offs in the shorter segment.

 

“I am a little surprised about the fact that the differential between the terminal repo rate, which has now become 5.5. Earlier, people were talking about a 60–65 basis point difference between your terminal rate and the 10-year G-sec,” said a market participant. “It beats logic as of this moment. I think there is a lot of panic and I think people are cutting positions as well,” the person added.