RBI did not accept any bids in the Rs 90 billion 10-year benchmark bond, the 5.85% 2030 bond, auction held last week. The market bid at yields much higher than the closing levels of 5.93% on the bond and RBI did not want to send signals that it was fine with yield on the bond trending higher.
RBI also announced an operation twist for Rs 100 billion where it will sell short tenor bonds and buy long tenor bonds, to reinforce its message to the market that it wants to protect the yield on the 10-year bond.
The tussle between the RBI and the market has been on for a while now, with RBI either devolving auctions on underwriters or announcing outright bond purchases or operation twists. The market is just not able to withstand the heavy supply of bonds through government and SDL auctions and clearly there is discomfort on yields at current levels given inflation is at closer to 7% and a new borrowing program will be announced in the budget for fiscal 2021-22 in February 2021.
The government may announce a huge spend budget to pull the economy out of covid stress and this will entail a huge borrowing program to fund the fiscal deficit. Even if RBI is willing to absorb a large part of the supply of bonds, the inflation expectations can shoot up and this will reflect on market appetite for bonds.
It is best to wait and watch for bond investors and traders, as appetite is low for bonds and yields are not being allowed to rise despite supply exceeding demand at current yields.
Government bonds, SDL and OIS yield movements.
During the week, 5.85% 2030 yield came down by 3 bps to 5.88%, 5.77% 2030 yield declined by 3 bps to 5.93% while 5.79% 2030 bond yield gained 2 bps to 5.98%. 6.45% 2029 bond yield remained unchanged at 5.99%. 5-year benchmark bond, 5.22% 2025, yield increased by 2 bps to 5.07%. Long term paper 7.16% 2050 yield was unchanged at 6.57%.
The spread of 10-year bond over 5-year bond (5.22% 2025) remained unchanged at 91 bps from previous week. On the other hand, 15-year benchmark over 10-year benchmark spread rose to 31 bps from 28 bps. 30-year benchmark over 10-year benchmark spread declined to 59 bps from 61 bps.
In the SDL auction conducted last week, average 10-year SDL yield rose to 6.57% from 6.55% last week. Consequently, spread with G-sec benchmark increased to 64 bps from 60 bps.
On weekly basis, 1-year OIS yield declined by 6 bps to 3.72% while 5-year OIS yield decreased by 2 bps to 4.65%.
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