Bond prices crash as Rs 7k-cr auction finds few takers

MUMBAI: Government bond prices fell to new lows after 67% of the Rs 7,000-crore bond auctioned by the Reserve Bank of India on Tuesday devolved on primary dealers (PDs). Following the devolvement, the yield on the benchmark 7.59% ‘16 paper rose to 8.32% as against 8.28% on Monday.

Since PDs do not have the capability to finance long-term holding of bonds, they will either sell the devolved bonds or borrow to fund their holding.

Dealers say that should they sell, as yields may cross the 8.50% levels. But if they choose to borrow, call rates could rise beyond 5.85%.

Treasury managers attributed the devolvement to lack of appetite for the bonds from market participants like banks and financial institutions.

In fact, they foresee a possibility of yields inching up further to cross the 8.50% levels on Wednesday or else rates on the interbank call money market rising beyond 5.85% as PDs would need to make the payments for the purchased bonds. Also, PDs could tap the collaterlised borrowing and lending obligations (CBLO) market to meet the payment requirements.

Devolvement typically takes place when there is not enough demand for the bonds and primary dealers are required to purchase bonds in order to complete the auction proceedings. RBI set the cut off yield at 8.75% on the longer tenor 7.50% 2034 government paper auctioned to raise Rs 2,000 crore as against the market expectations that revolved around 8.70%.

On the short-term 7.59% 2016 stock, the central bank set the cut off yield at 8.29% as compared to the higher expectations of around 8.35%.

Out of the Rs 2,000 crore to be raised via the long-term paper, there was a devolvement worth Rs 1,890 crore, while in case of the short term stock, the devolvement was of Rs 3,386 crore out of a total of Rs 5,000 crore. RBI on Tuesday extended the working hours in the gilt market to allow trading after the auction results were announced.