Uniform price method may not check gilt yield rise

Reserve Bank of India's decision to sell a new 30-year bond next week through uniform price method is unlikely to prevent a rise in yields as market sentiment is bearish due to many factors, dealers said.

"Although the uniform priced based method may limit the rise in yields to a certain extent, yields will go up because of the bearishness," a dealer at a large insurance company said.

On Tuesday, the RBI will auction Rs 6,000 crore of the 9.39 per cent, 2011 bond through the usual multiple price method. But, it has announced that Rs 4,000 of a new 30-year bond will be auctioned through uniform price method.

It is hoped that uniform price method will deter investors from bidding at high yields as all successful bidders will get the bonds at the cutoff yield, thereby eliminating the "winners' curse".

The large insurance company dealer said a cutoff of 8.20 per cent is expected for the new 30-year bond. Most other traders expected it to be 8.25-8.30 per cent.

The longest tenure paper 7.40 per cent, 2035 bond is currently traded at 8.21 per cent. For the 5-year bond, cutoff yield is expected at 7.35 per cent.

Big investors: Insurance and provident fund companies may not have good appetite for the 30-year paper, dealers said.

"If a big provident fund has invested around Rs 500 crore in State Bank of India bond issue, I think its appetite for government securities may be less," a dealer at a primary dealership said.

"Also, at the last auction, we saw little demand from the state-owned Life Insurance Company because at present their attention is diverted to the share market," the dealer said.

The large state-owned insurance company had invested around Rs 200 crore on May 22 to support the fall in the stock markets, dealers said.

Gilt market has been bearish, amid worries that RBI could raise interest rates to contain inflationary pressures.

The looming petroleum product price hike, advance tax outflows of around Rs 15,000 crore in the second half of this month, and foreign institutional investment outflow have added to the weak sentiment.

Investor interest may tilt towards corporate bonds instead of government securities because of higher yields, some dealers said.