The market wants bond prices to trade lower across maturities, given the large supply scheduled to flood the market
The ‘bond vigilantes’ who were warned by the RBI to stop demanding high yields in bond auctions do not seem to be in any mood to listen. The central bank is clearly livid, and this is apparent in the action that unfolded in the bond market on Friday.
The yield on 10-year bonds, which had moved lower to 6.01 per cent after the central bank unveiled the G-SAP 1.0 programme, spiked above 6.12 per cent after the first G-SAP auction on Thursday. The market was apparently not happy with the quantum of purchase in the 10-year bucket.
The bond market was on the edge through Friday, with 10-year yields trading at around 6.16 per cent, ahead of the weekly auction amounting to ₹26,000 crore in which 10-year securities accounted for ₹14,000 crore.
The auction results reveal that the RBI has not purchased any 10-year paper, though bids worth ₹28,000 crore were received for these securities. Ten-year bond yields plunged sharply after 3 pm, when auction results were announced, and are now trading at 6.08 per cent again. The RBI intended to offer bonds worth ₹25,000 crore in the first G-SAP auction. The response to the auction was robust, with offers worth ₹1,01,671 crore received.
The RBI accepted the entire ₹25,000 crore that it originally offered to purchase. The problem in the G-SAP auction, according to market sources, was that the ₹25,000 crore notified by the RBI was spread across maturities (see table). The amount intended for the 10-year bonds was only ₹7,500 crore. The bond market wanted higher purchases in this maturity because the government tends to borrow mainly in this bracket.
For instance, in the weekly auction scheduled for April 16, more than 50 per cent was ear-marked for 10-year securities. The level of nervousness among underwriters was obvious in the commission auctioned for 10-year bonds shooting up to 47.17 paisa on Friday.
The other reason why 10-year yields moved higher is because the cut-off yield for 6-year bonds bought in the G-SAP auction was 6.13 per cent.
While the RBI is trying to cool the yield in the 10-year bonds, the yields on 6, 7, 8 and 9 year bonds are higher than the 10-year, implying that the market does want the bond prices to trade lower across maturities, given the large supply scheduled to flood the market. The WPI inflation number released yesterday was yet another dampener for bonds.
“The expected trajectory of the WPI inflation, and its partial transmission into the CPI inflation, going ahead, supports our view that there is negligible space for rate cuts to support growth, in spite of the growing uncertainty related to the surge in Covid-19 cases, localised restrictions and emerging concerns regarding migrants returning to the hinterland. This is likely to keep a floor under the G-Sec yields,” says Aditi Nayar, Chief Economist, ICRA.
It’s clear that market forces dictate that 10-year yields have to move higher from here. It has to be seen how long the RBI can keep yields in check with these strong arm tactics and threats of ‘tandav’.