The government issued a new benchmark 10 year bond at 6.10% last week. The last three 10 year bonds that were auctioned, the 5.85% 2030 bond, the 5.77% 2030 bond and the 5.79% 2030 are all trading at yields of around 6.20% and higher. Yields have risen due to rise in inflation and high government borrowing.
The new 10-year bond at yield of 6.10% is the first issuance of a 10 year bond at over 6% since beginning of 2020. The auction for the 6.10% 2031 bond for Rs 140 billion saw interest of 2x the size, at around Rs 280 billion. Normally, new 10 year benchmark issuances see high bidding interest of well over 3x the size of the auction.
RBI had changed the auction methodology to uniform price auction where all bidders below cut off price, get allotted the bonds at the cut off price. Earlier all bonds were auctioned at multiple price auction, where yield was determined by market bids. RBI also accepted less than 20% of the total auction size of Rs 140 billion for underwriting, indicating that the central bank could surprise markets in the auction through cancellation of bids shown from government owned entities.
Market was worried about being allotted the bond where it did not have a say in the pricing of the bond, hence the weak interest.
Going forward, as economic activity picks up on easing covid lockdown measures and inflation trends higher on rise in prices of both commodities and goods and services on supply side constraints coupled with high government bond supply and market’s distrust on RBI managed yields, the 10 year yield will end up higher than 6.10% over the next many months.
Government bonds, SDL and OIS yield movements
New 10-year benchmark cut-off yield stood at 6.1% on 9th July. During last week, 5.85% 2030 yield rose by 13 bps to 6.19% while the 5.77% 2030 yield decreased by 1 bps to 6.26%. 5-year benchmark bond, 5.22% 2025 yield came down by 2 bps to 5.59%. 6.57% 2033 yield rose by 15 bps to 6.85%. Long-term paper, 7.16% 2050 yield gained 4 bps to 7.17%.
The spread of 10-year bond over 5-year bond (5.22% 2025) rose to 60 bps from 45 bps in previous week. The 15-year benchmark over 10-year benchmark spread rose to 66 bps from 64 bps while 30-year benchmark over 10-year benchmark spread decreased to 89 bps from 108 bps.
Average 10-year SDL auction cut-off rose to 6.99% from 6.94% during previous week. Spread decreased to 81 bps from 94 bps during previous week.
On weekly basis, 1-year OIS yield declined by 3 bp to 3.91% while 5-year OIS yield decreased by 5 bps to 5.36%.
We would love to hear back from you. Please Click here to share your valuable feedback