The flood of government paper has led to a problem of supply management on the bond market. Yields soared to a nine-month high of 7.31% on Friday after the Reserve Bank of India (RBI) borrowed again from the debt market, heightening concerns. The central bank borrows from banks by selling government paper of different maturities and interest rates.
The rising yields indicate that RBI, despite promising to run government debt in an orderly fashion is finding it difficult to manage it. The ten-year benchmark 6.90% bond maturing in 2019 closed the day at 7.31%, after touching an intra-day high of 7.34%–the highest since November 20. It had closed at 7.18% on Thursday.
Axis Bank senior vice-president (research) Saugata Bhattacharya said this was due to a combination of the impact of the buyback auction and continuing oversupply. On Thursday, RBI had offered to buy back Rs 6,000 crore worth of paper, but bought only Rs 5,400 crore, while the total offers received from banks and financial institutions were for Rs 13,000 crore. The huge imbalance was exacerbated by the fresh auction of government paper on Friday. So, prices fell and yields rose.
At the auction, the government sold Rs 5,000 crore of the 6.49% bond maturing 2015 at a yield of 7.10%. It also sold Rs 2,000 crore of the 8.24% bond maturing in 2027 at a yield of 8.09%. The market had expected the government to sell the 2015 bond at 7.05% and 2027 securities at 8.05%.
The government plans to borrow a record Rs 3.97 lakh crore from markets this fiscal to meet its fiscal deficit of 6.8% of GDP. So far, the central bank has sold Rs 2.61 lakh crore worth of bonds of the Rs 2.99 lakh crore planned in H1.
?As fiscal concerns sustain, bond yields headed further north. We expect ten-year paper in the range of 7-7.25% by next month and 7.5 -8 % by September 2010,? noted HDFC Bank chief economist Abheek Barua in a report.
Benchmark paper yields rose by 20 basis points this week and 31 basis points so far this month. They are up by 206 basis points to date in FY10. The yield on 6.90% government stock, 2019, was sold at 7.30% at the auction, much higher than market expectations of 7.25%, noted dealers.
Primary dealers bought Rs 591 crore and Rs 321 crore of the unsold 2015 and 2019 securities, respectively. Top-traded securities on Friday were the 6.35% bond maturing 2020 and 6.90% bond maturing 2019.