1 Aug 2021

Unwanted!! Benchmark 5- & 10-year G-secs - Weekly Fixed Income Analysis

Administered pricing of G-secs like small savings rates or even fuel and agri commodities leads to lack of market confidence. RBI needs to let the market determine the yields on benchmark bonds while it goes about setting its policy stance and buying bonds.

author dp
Team INRBonds
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Why the lack of market interest in benchmark bonds?

RBI once again gave underwriters almost 80% of the Rs 110 billion of benchmark 5-year G-sec on offer. Last auction and many auctions prior to last, RBI has been giving underwriters the 5- & 10-year bonds in auctions or has even cancelled many auctions due to lack of demand at market yields.

 The 5 year and 10-year benchmark bonds have seen bidding at yields higher than market yields in the bond auctions. RBI has been unwilling to give the yields the market wants and has resorted to devolvement of the auctions on to the underwriters or even cancelling a few auctions.

The market shunning benchmark bonds is despite RBI buying Rs 1 trillion of bonds every quarter to offset the huge government borrowing program where supply of government and state government bonds average over Rs 400 billion a week. RBI is purchasing bonds in the medium to long tenor as well as issuing floating rate bonds to reduce the duration risk of rising interest rates for investors.

The bond market has not been allowed to set market rates on benchmark bonds given that RBI is managing the yield curve and this is making markets nervous on buying and trading the bonds. Hence the lack of interest in the benchmark bonds.

 

Auction Devolvement (FY22)

Date of Auction

Government bond

Notified (Rs billion)

Devolvement (Rs billion)

09-Apr-21

New GS 2026

110.00

109.26

28-May-21

5.85% GS 2030

140.00

74.36

03-Jun-21

5.63% GS 2026

110.00

107.35

03-Jun-21

6.67% GS 2050

70.00

19.44

11-Jun-21

5.85% GS 2030

140.00

99.75

18-Jun-21

5.63% GS 2026

110.00

27.78

25-Jun-21

4.26% GS 2023

30.00

28.99

02-Jul-21

5.63% GS 2026

110.00

104.95

23-Jul-21

6.10% GS 2031

140.00

111.44

30-Jul-21

5.63% GS 2026

110.00

74.65

 

Cancelled Auctions (FY22)

Date of Auction

Government bond

Notified amount

16-Apr-21

5.85% GS 2030

140.00

23-Apr-21

5.63% GS 2026

110.00

14-May-21

5.85% GS 2030

140.00

25-Jun-21

5.85% GS 2030

140.00

 

Government bonds, SDL and OIS yield movements        

During last week, 6.10% 2031 yield rose by 4 bps to 6.20% while 5.85% 2030 yield remained unchanged at 6.23%. 6.64% 2035 yield rose by 4 bps to 6.81%. 5-year benchmark bond, 5.63% 2026 yield gained 4 bps to 5.73%. 6.57% 2033 yield rose by 1 bp to 6.66%. Long-term paper, 7.16% 2050 yield remained unchanged at 7.15%.

The spread of 10-year bond over 5-year bond remained unchanged at 47 bps from previous week.  The 15-year benchmark over 10-year benchmark spread declined to 46 bps from 49 bps while 30-year benchmark over 10-year benchmark spread decreased to 91 bps from 93 bps.

Average 10-year SDL auction cut-off declined to 6.99% from 7.01% during previous week while spread declined by 4 bps to 81 bps from 85 bps during previous week.

On weekly basis, 1-year OIS yield rose by 2 bp to 3.88% while 5-year OIS yield increased by 2 bps to 5.23%.

                              

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