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Fixed Income

Another Gilt Auction devolves


RBI’s 12,000 cr. auction today was undersubscribed – meaning, not enough buyers – to extent of 912 cr., or 7.6% of the auction amount.

This devolves on the primary dealers – who will need to pay up. Funny thing is – the 7 6 year bond, a 2015 gilt, wasn’t subscribed (short 591 cr.) even with a cut off yield at 7.10%. Just a few weeks back, bidders got in with a 10 year bond at 6.90% yield. (Which, btw, was also 321 cr. short of subscription, at a 7.30% yield) A few weeks, and the appetite for government bonds has degraded dramatically.

Some say it’s because corporate credit is reviving, so people would rather lend to corporates at a higher yield. Of course, when as a government you swear to rescue anyone and everyone, obviously money will run to the higher interest rate – after all, if safety exists everywhere, why lend to the government. The moral hazard hits back.

But that may not quite be true. Banks dropped 130,000 cr. into reverse repo – meaning they really have no other use for the money.

Another common grouse was that RBI always sold illiquid bonds. But the benchmark 2019 bond is one of the most heavily traded; even that was undersubscribed.

It’s not even like people are ditching bonds like mad. Just yesterday, the RBI tried to buy back bonds – last year’s benchmark 10 year, the 2018 bond – at a yield of 7.28%. See, that’s a couple basis points off the yield as RBI sold today – very well worth the effort of a year’s wait less – and definitely in the “yield curve”. Yet, the RBI couldn’t buy enough at that yield – the buy-back only got them bonds worth 5,411 cr.

So it’s not panic, yet yields are dropping like crazy; just the last few days have seen benchmark yields move from 7.01% to 7.30% – a fairly large move for an otherwise non-volatile bond. Bloomberg says there’s no appetite for govt. bonds anymore. But someone forgot to tell the RBI; it’s selling another 12,000 cr. next friday.

Being the regulator and watching so much money flowing into rev. repo every day, the RBI could hike the Statutory Liquidity Ratio (SLR) back to 25% (it had reduced SLR to 24% earlier, to help a bad liquidity situation). This extra 1% is about 28,000 cr. that the banks will need to buy SLR securities, government bonds being the most liquid of that variety.

The government’s panic pushing of these bonds could be a sign of things to come; things you and I don’t know about. Conspiracy theories abound – inflation will rise, so will interest rates, and the government will have to pay more. Or, a big bank or FI will go under, liquidity will drop and there won’t be money to chase those bonds. Or, they need the money before swine flu goes berserk and they’re afraid to touch your money then, so give it to them now please. Conspiracy theories are only fun if you have illegal substances to go with them.


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