RBI devolves 10-yr bond in 2nd auction

Underwriters bought ~11,144 cr of the ~ 14,000 cr on offer

The freshly launched 10year bond witnessed its first devolvement on Friday as the markets asked for higher yields than what the Reserve Bank of India (RBI) was comfortable offering.

Of the ~14,000 crore on offer, the central bank made the primary dealers, or the underwriters of the bonds, buy ~11,144.145 crore of the security. This was the second auction of this bond, launched on July 9.

The cut-off yield was 6.15 per cent in the auction. The yields of this benchmark 10year bond closed at 6.165 per cent in the market. The auction was part of ~26,000 crore to be raised through three bonds.

Bond dealers say the RBI’S G-SAP auctions on Thursday, through which it buys bonds from the secondary market to infuse liquidity, set the tone for Friday’s auctions.

“In the G-SAP, the market sold the 9-year paper to the RBI at 6.50 per cent, and the 8-year paper at 6.33 per cent. Now, if the 8- and 9-year papers are getting traded in the 6.3-6.5 range, how can the 10-year paper stay at 6.10 per cent level,” said a senior bond dealer with a bank.

“The root cause is that there is no view in the market, and nobody wants to take duration risk these days. The liquidity in the new 10-year paper is also low, and so there is a huge chance of getting stuck if liquidity doesn’t scale up fast. So, the market is not as interested in the 10-year bond as it used to be,” said the dealer requesting anonymity.

The market also doesn’t expect the RBI to conduct GSAP buying on the new 10year bonds anytime soon. The G-SAP, if at all, will likely be conducted on illiquid papers and not on the benchmark ones, the market expects. That also has brought down interest in these bonds.

“There is no immediate trigger for pushing up the yields, except, maybe, rising crude prices. What really could be happening is that the market is testing the RBI’S tolerance level. Every devolvement comes as a signal, and this should also work to allow the yields to settle around the cut-off level for now,” said another senior bond dealer.