Gilt prices dip to a new low on Rs 7k-cr auction eve

MUMBAI: Government bond prices dipped to a new low on Monday as dealers turned cautious on the eve of the Rs 7,000-crore gilt auction. Yields on the 10-year government bond closed at a new four-and-a-half year high of 8.28%, up from Friday’s close of 8.21%.

Treasury managers explained that there was lesser demand from traders, who refrained from taking fresh positions and building up their existing positions. This lack of interest was attributed to the absence of any positive signals for the market to pick cues from. In intra-day trade, the price of the benchmark 7.59% 2016 government stock fell by nearly 30 paise, from an opening at Rs 95.7 to close the day at Rs 95.4. Correspondingly, the yield on the stock rose from 8.23% to 8.28%.

On Tuesday, the Central government is scheduled to auction two dated securities for Rs 7,000 crore. The Centre would be selling the 7.59 % 2016 bond for Rs 5,000 crore and the 7.50% 2034 for Rs 2,000 crore.

On Friday, the Reserve Bank of India had announced that seven Indian states will be raising Rs 1,683 crore through the sale of 10-year loans on July 13.

Treasury managers felt that the auction on Tuesday could provide some direction as to where the market rates are poised to move, before a central bank review later this month.

“The market is keen on the cut-off yields at the auction. Higher yields would convince dealers about hardening of interest rates in the short-term,” said a trader with a primary dealership. Most primary dealers expect the commission cut-off on the shorter tenor security to be higher than that on the long-term gilt.

Simultaneously, the domestic rate swaps indexed to overnight interest rates also hit fresh four-year highs, ahead of the auction on Tuesday with traders anticipating a second rate hike announcement.

The benchmark five-year overnight indexed swap rate was at 7.36/38%, compared to Friday’s close at 7.32/33. This is the highest level since July 10, 2002 when it was quoted at 7.32%.