The coupon on the new 10-year bond was roughly 30 basis points below the yield on the current 10-year bond which settled at 9.10% on Friday, up from 9.08% Thursday. The new 10-year bond was in big demand with investors scrambling to get hold of the future benchmark. While the cut-off yield on the benchmark paper was set at 8.83% in the secondary market, the yield dropped to a low of 8.77%. Investors are understood to have sold off most bonds, except the new 10-year benchmark paper, on worries rising inflation may drive up policy rates and that the US Federal Reserve may soon start scaling back its monthly bond purchases of $85 billion under its quantitative easing programme.
Meanwhile, the rupee slipped below 63 in intra-day trade but closed marginally stronger at 62.86 on Friday compared with the previous close of 62.94. For the week, the rupee gained 0.4% against the dollar, snapping a five week losing spree. Central bank intervention on Thursday and Friday supported the rupee after fears of a tapering in the Federal Reserves bond-buying programme hit emerging market currencies. The offshore markets, however, continue to reflect further weakness in the currency with the one-month contract in the non-deliverable forwards (NDF) market trading at near 63.40.
In 2011, the government had issued 10-year bonds at a coupon rate of 8.79% at a time when the RBIs benchmark repo rate the rate at which the central bank lends to banks was at 8.5%; currently the repo is at 7.75%.
However, the operational rate is considered to be closer to the marginal standing facility (MSF) rate considered the penal rate of 8.75% given the tight liquidity conditions. Yields, however, are unlikely to come down much further, especially ahead of the RBIs mid-quarter monetary policy review in December, where some expect another hike of 25 basis points in the repo rate.
The weak sentiment in the bond market was reflected even in the auction where along with the new 10-year benchmark bond three other bonds were sold. Although there was no devolvement as feared by some, the RBI accepted a fraction of the bids received for the bonds, indicating that most bond traders had asked for a very high yield.
For instance, the central bank had received 129 bids for the 7.28%, 2019 bond but it accepted only 32 of them. The other two bonds too saw a similar acceptance level. The RBI sold in total Rs 15,000 crore worth of bonds.
The RBI rejects bids when it feels the yield is very high. While some amount of fatigue is setting in, the auction was nevertheless well-bid. But yields are unlikely to come down, said a bond trader with a private bank.
Bond traders said that for upcoming auctions to sail through, the central bank will have to support the market with bond purchases under the open market operations.
Unless there are a couple of more OMOs, market sentiment would not be revived and yields could remain at current levels, said the treasury head of a public sector bank. The RBI had bought Rs 6,157 crore worth of bonds through an OMO auction on November 18 and bond traders expect more such auctions going forward.