 "The pace of foreign inflows into the government bond market, following the inclusion of Indian bonds in JPMorgan's Government Bond Index-Emerging Markets (GBI-EM), has been slower than expected, maintaining yield stability, dealers said.")
Government bonds gave up almost all the gains by the end of the trade on Wednesday due to caution ahead of the weekly auction on Thursday. The weekly auction of government bonds is scheduled to be conducted on Thursday, since markets are closed on Friday on account of Independence Day.
The yield on the 10-year benchmark government bond softened by 3 basis points during the day on the back of short covering, said dealers. It settled at 6.48 per cent, against the previous close of 6.49 per cent.
“There was short covering by primary dealers and state-owned banks in the morning,” said a dealer at a primary dealership.
“Later, in the day there was sell-off due to speculation that RBI has been enquiring about tomorrow’s (Thursday) auction which led to caution,” he added.
Market participants said that with over ₹50,000 crore of central and state government bonds hitting the market each week, and investment and trading books already under stress due to mark to market losses amid rising yields, the capacity to absorb fresh issuance is steadily shrinking.
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In the absence of expectations for further RBI open market operations, buyers remain reluctant to step in.
Market participants said that the underwriting fee might be higher than the previous week.
“The demand at the auction will determine the course of government bond yields,” said a dealer at a primary dealership.
“There is caution, but broadly the auction should sail through. The underwriting fee might be higher than usual,” he added.
The government plans to sell ₹50,000 crore of 2030 bond, and ₹13,000 crore of new 2055 bond.
The cut-off yield on treasury bills at the weekly auction on Wednesday rose by 2 basis points to 3 bps across tenures as surplus liquidity fell to ₹2.62 trillion, against ₹3.97 trillion in the previous week’s treasury bill auction.
Overnight money market rates also rose with WACR settling at 5.49 per cent, near the repo rate of 5.50 per cent.
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