5-Year Paper Auction Tomorrow

The government of India has announced an auction of five year central government paper for a notified amount of Rs 3,000 crore on August 13.

The announcement of a fresh auction was expected by the market soon after the issue of four-year paper last week, which saw an overwhelming response.

In fact, market players feel this auction should have been timed soon after the four paper, if the government wanted to encash on the bullish sentiment.

The market expectation of the cut-off yield, in the light of the weakening rupee, may now be revised slightly upwards.

Prices of gilts, which have been on the rise for the past 4-5 days, rose further by over 10 paise yesterday, but retraced its gains on the back of a depreciation in the rupee. In the secondary market, the four year paper 11.68 per cent 2002 was traded up to Rs 100.38, but came down later.

 

The security is being traded at an yield of around 11.55 per cent levels. The latest six year paper auctioned - the 11.95 per cent 2004 - is being offered by the Reserve Bank of India through its sale window at an yield of 11.87 per cent, at which it is estimated to have sold around Rs 700 crore till date.

The cut-off yield on five year paper is hence expected to be around 11.70-75 per cent, say dealers.

Nevertheless, the issue is expected to be fully subscribed in view of the liquidity and the fact that the market is no longer averse to medium-dated gilts. "Interest in securities is now extending to the medium term gilts. Those who did not get the four year paper at the last auction are bound to show interest in this security," a dealer said. On the primary market yield curve, the five year paper is at 11.75 per cent (yield given at the auction on July 1), while the six year gilt is at 11.95 per cent.

Interestingly, the RBI had, on Monday, hiked in the notified amount on the auction of 364 day t-bills to Rs 400 crore. The response to this auction in the light of a slight rise in yields in the secondary market and the announcement of a securities auction in the meantime is to be seen.