Synopsis: RBI has been rejecting bids in government bond auction and the market has no clue on why it is rejecting the bids. Market confusion can cause distortions in bond pricing, which will hurt investors.
Auction bids rejected
RBI rejected all bids in the Rs 5.63% 2026 gsec auction held last week. The bond saw bids worth Rs 387 billion for the Rs 110 billion amount on auction. RBI did not accept all bids for the 6.67% 2050 bond, accepting just Rs 39 billion against the Rs 70 billion auction amount at a cut off yield of 6.8%. The bond saw bids worth Rs 136 billion in the auction.
The 6.64% 2035 bond auction for Rs 100 billion saw bids worth Rs 350 billion and RBI accepted Rs 132 billion in the auction (exercising greenshoe option) at a cut off yield of 6.73%.
This is the 2nd consecutive auction where RBI has been rejecting bids. The question is why are bids being rejected when a massive borrowing program of Rs 12 trillion has to go through. The fact that the RBI gave the market yield of 6.73% on the 2035 bond and did not accept all bids for the 2050 bond which saw cut of 6.80%, a difference of just 7bps for 15 years maturity gap, does not make any sense to the market nor does the rejection of all bids in the 2026 bond auction.
Bond market does not know where to go
Bond auctions are held to arrive at market determined yields based on demand and supply. When RBI does not allow market to determine bond yields, then there is no market determined yields. Bond markets are completely in the dark as it cannot fight a central bank that can print money and use its muscle.
Bond market volumes will fall and the market itself is in the danger of becoming non-existent and this can cause huge problems going forward as it will show in currency values. The INR can plunge if FIIs pull out money if they perceive threat to the value of their capital if bond yields do not reflect macro fundamentals.
Government bonds, SDL and OIS yield movements.
During the week, 5.85% 2030 yield declined by 5 bps to 6.04%. 5.77% 2030 yield decreased by 5 bps to 6.24%. 5-year benchmark bond, 5.22% 2025 yield came down by 2 bps to 5.53%. 6.57% 2033 yield lost 15 bps to 6.61%. However, long term paper 7.16% 2050 yield remained unchanged at 6.84%.
The spread of 10-year bond over 5-year bond (5.22% 2025) rose to 66 bps from 54 bps in previous week. The 15-year benchmark over 10-year benchmark spread declined to 57 bps from 67 bps while 30-year benchmark over 10-year benchmark spread remained unchanged at 79 bp.
In the SDL auction conducted last week, average 10-year SDL yield rose to 6.83% from 6.79% seen in the previous week. Consequently, spread with G-sec benchmark rose to 75 bps from 66 bps.
On weekly basis, 1-year OIS yield declined by 8 bps to 3.75% while 5-year OIS yield declined by 4 bps to 5.11%.
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