Synopsis: RBI rejected all bids for the Rs 140 billion, 5.85% 2030 bond auction, which showed the disconnect between RBI and bond market. Heavy auction supply is clearly hurting the bond market.
RBI rejects all bids for the 5.85% 2030 bond auction
The last bond auction held on the 16th of April, saw the RBI rejecting all bids for the 5.85% 2030 bond, as it did not want to give the market higher yields. The Rs 140 billion auction of the 5.85% 2030 bond saw bids worth Rs 280 billion, but no bids were accepted. Given that the government is scheduled to borrow Rs 12 trillion in this fiscal year, every bid rejection will lead to bunched up supply and this can cause further stress in bond yields.
RBI had bought Rs 250 billion of bonds through its G-SAP program that included the 5.85% 2030 bond, which it bought at a yield of around 6.03%. The market had bid for the bond at yields higher than 6.03%, which the RBI did not want to give.
Apart from government bond auction, there is a switch auction this week for a total amount of Rs 200 billion, where government will buy short tenor bonds and sell long tenor bonds, adding to the supply of long bonds.
Higher CPI inflation and rising covid cases are unnerving bond markets
CPI inflation for March 2021 printed at higher levels and with high global oil and other commodity prices, inflation expectations are higher. Given rising covid cases in India, worry of government borrowing increasing is going up. Bond market is showing its worry by bidding for higher yields in the auctions.
Domestic consumer inflation rose to 5.52% in March 21 from 5.03% in previous month. The Consumer Food Price Index stood at 4.94% in March 21. During the month core inflation came in at 5.76%.
During Feb 21, India’s industrial output contracted by 3.6% as compared to contraction of 1.6% in previous month. During April-February FY21, the industrial sector experienced a contraction of 11.3%, compared to a 1% growth in the corresponding period a year ago.
Government bonds, SDL and OIS yield movements.
During the week, 5.85% 2030 yield rose by 7 bps to 6.09%. 5.77% 2030 yield increased by 5 bps to 6.29%. 5-year benchmark bond, 5.22% 2025 yield moved up by 1 bps to 5.55%. 6.57% 2033 yield gained 9 bps to 6.76%. Long term paper 7.16% 2050 yield rose by 7 bps to 6.84%.
The spread of 10-year bond over 5-year bond (5.22% 2025) rose to 54 bps from 48 bps in previous week. The 15-year benchmark over 10-year benchmark spread rose to 67 bps from 65 bps while 30-year benchmark over 10-year benchmark spread increased to 79 bps from 74 bps.
In the SDL auction conducted last week, average 10-year SDL yield rose to 6.79% from 6.75% seen in the previous week. Spread with G-sec benchmark came down to 66 bps from 72 bps.
On weekly basis, 1-year OIS yield declined by 3 bps to 3.83% while 5-year OIS yield declined by 6 bps to 5.11%.
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