The government’s bond auction devolved on Friday on expectations of a further increase in the borrowing plan, dealers said. The borrowing plan of the government announced last month was higher than the market expectations.
Primary dealers had to buy 40 per cent of the notified amount in the auctions of the 10-year benchmark government bond 7.80 per cent and the seven-year government bond 7.83 per cent as markets demanded higher yields. The cut-off yields were set at 8.78 per cent for 10-year paper and 8.79 per cent for seven-year paper by the Reserve Bank of India.
There was devolvement in the 10-year benchmark last financial year in two auctions. Bond market participants are expecting yields to move up on the back of continued weekly supply of Rs 12,000 crore to Rs 15,000 crore government bonds during the second half of the financial year.
“Markets are nervous just ahead of the policy and are bidding for higher yields but it seems the central bank is not happy with the pace at which the yields are rising,” said a bond dealer with a domestic brokerage. Yields on the 10-year benchmark government bond have marched up by 34 basis points since the announcement the government would borrow Rs 2.2 lakh crore higher in the second half of the current financial year than Rs 1.67 lakh crore planned earlier.
A treasury official of a Mumbai-based bank said the markets had tried to communicate fatigue would set in very fast due to excessive borrowing. “Demand is bound to be lacklustre, with most banks sitting on excess Statutory Liquidity Ratio and no trading gains in the market,” he said.
Yields on the 10-year benchmark government bond ended at 8.78 per cent on Friday, five basis points higher than the previous day’s close.
T S Srinivasan, general manager (treasury) at Indian Overseas Bank, said the higher cut-off yield and devolvement showed the market reaction to the regulator’s statement prioritising the tackling of inflation.
The market is also worried over the fall in the pace of revenue collection as it could lead to more borrowings. That would be over and above the extra Rs 53,000 crore that would be raised in the second half,” he said. Moses Harding. head-global markets group, IndusInd Bank, expects the yields on the 10-year benchmark government bond to touch the nine per cent mark in the run-up to the half-yearly policy review scheduled for October 25, 2011. “It would need the central bank’s pause mode on rates to push the 10-year yield back into the 8.60-8.75 per cent range, else the risk of nine per cent being tested is just a matter of time,” he said.
