The government was unable to persuade the bond markets to subscribe fully to the very first auction of the year. Of the Rs 5,000-crore auction of the most liquid paper in the government arsenal, the benchmark 10-year bonds saw a devolvement of Rs 448 crore. The price of the paper slipped in the process, pushing its yield above the 8% mark on Friday.
The rupee, meanwhile, touched a near 19-month high against the dollar on Friday to close at Rs 44.29 even as the country?s foreign exchange reserves went up by a hefty $2 billion in the week ended April 2, 2010.
Dealers said the surge in bond yields so early into the borrowing programme came as a bit of a shock. ?We were expecting yields to move up only towards the end of April after a couple of auctions,? said Jayesh Mehta, MD & country treasurer, Bank of America. Mehta said the market had expected bids to be aggressive in the first auction and are taken aback at the small devolvement instead.
Ashish Parthsarathy, head of treasury at HDFC Bank said dealers were also a tad nervous as they felt a tightening of the monetary policy was imminent. ?We were not really expecting such a sharp move and such a muted response to the auction, ?Parthsarathy said.
Hitendra Dave, director and head of global markets at HSBC Bank, said the market had started pricing according to the fresh supply of paper. ?Throughout March the yields have been trading at below fundamental levels but with the borrowing programme having begun, the yields have moved up and should range between 8.25% and 8.5% as the supply increases.?
Meanwhile, large foreign inflows into equities and debt saw the rupee strengthen further on Friday. Hemant Mishr, MD & head of global markets, South Asia, Standard Chartered, said the rupee could head up all the way to levels of 42 against the greenback, adding that the Reserve Bank had refrained from intervening in the forex market so far but was keeping a close watch on the exchange rate. BoA?s Mehta said it was possible the RBI would step in, after a point, in a bid to bail out exporters. FIIs have pumped around $10 billion into stocks and bonds after January 2010.
The government has front-loaded its borrowing programme for 2010-11 with 63% or Rs 2.87 lakh crore expected to be mopped up between April and September. Friday?s auction was for Rs 12,000 crore, including Rs 5,000 crore for the 10-year paper. There was some apprehension in the market about whether a new 10-year bond would be floated as is common when the government starts the borrowing programme each year. Dealers said while there would be some loss on the existing 10-year bond, it would be minimal. The government hopes to pick up Rs 3.45 lakh crore this year.