The bond vigilantes, who have been warned by the RBI not to ask for high yields on bond auctions, do not seem in the mood to listen. The central bank is clearly angry and this is reflected in the action that took place in the bond market on Friday.
The returns are increasing
The yield on 10-year bonds, which had fallen to 6.01 percent after the central bank’s disclosure of the G-SAP 1.0 program, rose to over 6.12 percent after Thursday’s first G-SAP auction. The market was apparently not satisfied with the purchase volume in the 10-year range.
The bond market was on the verge through Friday, with 10-year returns of around 6.16 percent ahead of the weekly auction of 26,000 crore which 10-year securities accounted for 14,000 crore.
The auction results show that RBI did not purchase a 10-year paper despite having received bids for those securities worth £ 28,000. The yields on ten-year bonds fell sharply after the auction results were announced after 3 p.m. and are now back at 6.08 percent. RBI intended to offer bonds worth 25,000 crore in the first G-SAP auction. The auction response was robust, with bids valued at £ 1,0117.71 crore.
The RBI accepted the entire 25,000 crore it originally put up for sale. According to market sources, the problem with the G-SAP auction was that the 25,000 crore reported by the RBI were distributed over the runtimes (see table). The amount allotted for the 10 year bonds was only £ 7,500 crore. The bond market wanted higher purchases over this period as the government tends to borrow primarily in this range.
For example, in the weekly auction scheduled for April 16, more than 50 percent was earmarked for 10-year securities. The level of nervousness among the underwriters was evident in the commission auctioned on 10-year bonds that shot up to 47.17 paisas on Friday.
The other reason the 10-year yields have increased is because the cut-off yield on 6-year bonds bought in the G-SAP auction was 6.13 percent.
While the RBI is trying to cool the 10-year bond yield, the 6, 7, 8, and 9-year bond yields are higher than the 10-year bonds, which means the market wants that bond prices will trade lower over maturities given the large supply that is expected to flood the market. The WPI inflation figure released yesterday was another drag on bonds.
“The expected course of WPI inflation and its partial transfer to CPI inflation support our view that despite the growing uncertainty surrounding the rise in Covid-19, there is negligible scope for rate cuts to support growth cases, localized Restrictions and emerging concerns about the return of migrants to the hinterland. This is likely to stay below the G-Sec returns, ”says Aditi Nayar, chief economist at ICRA.
It is clear that market forces dictate that 10 year returns must rise higher from here. It has to be seen how long the RBI can keep returns in check with these strong arm tactics and threats from ‘Tandav’.