Underwriters rescue sale of 10-year bond after high inflation spooks traders

By: |
August 14, 2020 5:34 PM

Underwriters rescued the sale of a recently issued 10-year bond after a high-inflation print spooked traders about the timing of future rate cuts in India. Sovereign bonds extended losses.

The Reserve Bank sold 340 billion rupees of bonds across maturities versus 300 billion rupee planned.

Underwriters rescued the sale of a recently issued 10-year bond after a high-inflation print spooked traders about the timing of future rate cuts in India. Sovereign bonds extended losses. Primary dealers had to pick up 46.4 billion rupees ($619 million), or more than a quarter, of the 5.77% 2030 bonds offered, the monetary authority said in a statement on Friday. The cutoff yield for the paper was set at 5.9634% versus 5.95% estimated in a Bloomberg survey. The Reserve Bank sold 340 billion rupees of bonds across maturities versus 300 billion rupee planned.

This is the first time in almost a year that underwriters have had to step in. The devolvement of the 10-year paper in just its second auction highlights weak appetite for debt after the central bank at its policy review last week didn’t announce measures to boost demand for sovereign notes. To worsen matters, data late on Thursday showed retail inflation spiked in July, raising doubts about further monetary easing.

“The 10-year bond is fast losing premium it used to command over the yield curve,” said Naveen Singh, head of fixed-income trading at ICICI Securities Primary Dealership Ltd. in Mumbai. There will be further pressure on bonds if the RBI doesn’t intervene soon, he said.

The yield on the 5.79% bond due 2030 rose 7 basis points to 5.97%, the highest closing yield for the paper. The auctioned 5.77% 2030 debt yield was up 9 basis points to 5.95%. Trading hours were extended through 4 p.m. local time due to the delay in announcing the auction results.

Retail inflation accelerated closer to 7% in July, creating a dilemma for policy makers who have vowed to keep their easing bias intact for as long as it is necessary to revive economic growth. The Reserve Bank of India kept interest rates on hold at a policy review last week amid inflationary pressures.

“We maintain further scope for up to 50 basis points cut in the current cycle, but with Monetary Policy Committee’s desire for statistical reflection of durably low inflation, near-term cuts may be ruled out,” said Madhavi Arora, an economist at Edelweiss Securities Ltd.

The prospect of a prolonged rate pause is seen dampening demand for government debt as the market faces 12 trillion rupees ($160 billion) of sovereign bond sales this fiscal year. Yields have already been on the rise since the RBI disappointed markets by not announcing measures to supplement the demand for bonds in the latest policy review.

Dividend Payout

Arora of Edelweiss expects the RBI to continue its open market bond purchases and Federal Reserve-styled Operation Twist, where the central bank simultaneously buys and sells bonds in long and short-tenors.

HSBC Holdings Plc. lowered its rate cut projections after the print. It now expects 25 basis points of repo rate cut in the first quarter of the next year as against an earlier estimate of 50 basis points cut in the December quarter of 2020, a note from the bank showed.

Bond traders are also closely watching a central bank board meeting on Friday to see whether the RBI announces its annual dividend payout to the government. Last year the RBI’s board approved a record payment of 1.76 trillion rupees to the government, which included 1.23 trillion rupees as dividend and 526.4 billion rupees from its surplus capital.

This year, while New Delhi has budgeted for a 600 billion-rupee transfer, the local media has speculated that the administration is expecting more. Analysts and economists are forecasting a payout of anything between 400 billion rupees to 1 trillion rupees.

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