Short-term bond yields soften ahead of govt's buyback on Thursday

Shorter-tenor government bond yields fell on Monday following the government's decision to repurchase short-term government bonds maturing within six to nine months, said dealers. The 10-year benchmark bond yield also softened, tracking the decline in US Treasury yields after lower-than-expected jobs data.

The yield on the 5-year bond fell by 5 basis points to settle at 7.10 per cent, compared to 7.15 per cent on Friday, while the 10-year benchmark bond yield softened by 4 basis points to settle at 7.11 per cent, down from 7.15 per cent on Friday.

“The US NFP (non-farm payroll) data was lower, which led to a rally, and the RBI's buyback announcement led to a rally in short-term papers like the five-year,” said a dealer at a state-owned bank.

On Friday, the Reserve Bank of India (RBI) announced its plan to repurchase securities worth Rs 40,000 crore. According to the RBI's release, the securities scheduled for buyback include the G-Secs 6.18% 2024, 9.15% 2024, and 6.89% 2025. Notably, no specific amount has been allocated for individual securities, and the auction process will use the multiple price method, the RBI stated.

The auction will be conducted on Thursday. This kind of repurchase was last seen in 2018.

“Initially, there was profit booking, and then everyone was buying,” said a dealer at a state-owned bank. “Mutual funds hold the majority of the short-term papers, but today all the segments were on the buying side,” he added.

The decision came amidst observations that while government spending surged between February and April, there is an anticipated slowdown leading up to the June election results. In consultation with the RBI, the government opted for the buyback to mitigate potential fluctuations in banking system liquidity, thus safeguarding against adverse effects on borrowing costs, said market participants.