PDs suffer in yield war between RBI and bidders

Government Securities (G-Sec) auctions are caught in a tug-of-war between bidders demanding higher yields and the Reserve Bank of India’s reluctance to concede that, leading to devolvement on primary dealers (PDs).

Of the four G-Sec auctions conducted since the Budget, only one (on February 11) was fully subscribed without PD support.

In the G-Sec auctions conducted since the Budget announcement, the RBI devolved G-Secs aggregating about ₹37,000 crore on PDs.

Borrowing target

Finance Minister Nirmala Sitharaman had announced in her Budget speech that the government would need to borrow another ₹80,000 crore in February-March and the gross borrowing from the market for FY22 would be around ₹12-lakh crore.

The market wants higher yields, but the central bank, which is the banker and debt manager to the government, wants to the keep the yields from rising as they have implications for the cost of government’s borrowing.

Rising G-Sec yields will have a ripple effect as the cost of borrowing of States and India Inc too will rise in sync.

Since January-end, the yield on the widely traded 10-year G-Sec (maturing in 2030 and carrying 5.77 per cent coupon rate) has increased by about 23 basis points to 6.1792 per cent, with its price declining by ₹1.59 to ₹97.1.

Referring to the devolvement of two G-Secs aggregating about ₹21,594 crore on PDs at Thursday’s auction, Marzban Irani, Chief Investment Officer - Fixed Income, LIC Mutual Fund, said: “The bids were on the higher side and the RBI wanted to give a signal that it was not comfortable at those yields. Hence, the auction got devolved.”

Market wants correction

Irani observed that the market wants the yields to correct. The yield curve across maturities such as 6 years, 7 years, 8 years, and 15 years has corrected but not the 10-year yield. Hence, the market wants the 10-year G-Sec yield to inch up, he added.

“The borrowing programme this year as well as next is on the higher side. Unless the yield curve gets corrected, there won’t be aggressive bidding at the auctions. The RBI will have to support via open market operations (OMOs) at regular intervals,” he said.

Hardening yields

Edelweiss Mutual Fund, in its latest bond market update, noted that G-Sec yields have hardened in anticipation of a mismatch in the demand-supply dynamics.

“The bond market was hoping that the RBI would guide the market with some sort of calendar for OMO bond purchase programme for the next year. However, the RBI has refrained from doing that.

“Perhaps they don’t want to pre-commit themselves at this point. However, the RBI said that the government’s borrowing programme will be concluded without any disruption. This is quite reassuring. However, the bond market is not convinced on this yet,” the report said.

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