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Fixed Income

First Government Bond Auction Fails

On friday, the new financial year’s first government bond auction for 12,000 crores failed; about 448 crores devolved on primary dealers. (101: Auctions are underwritten. So if there’s not enough demand, the dealers, who get a commission on the bond sales in the auction, are supposed to buy what’s left)

That might not be much but here’s the thing – what devolved was the ultra liquid 10 year bond, of which 5,000 crores were supposed to be sold. The two year and 17 year bonds, of 5,000 and 2,000 cr. each, sold completely. The 10-year had a cutoff yield of 7.96%, which does seem pretty high considering they closed Thursday at 7.75% – and yet, not enough demand.

In the market yields went up to 8%. Is it too much supply, inflation fears (interest rates will go up, why buy now) or simply a wait-and-watch approach (so much being issued, lets hang on for a while).

At 8% the yields are already very good compared to insurance annuities and have next-to-zero risk. Financial Express says the FII investments in government securities are close or already at the $5bn limit. They can’t buy more than $200m apiece anyway. We’re in the funny situation of domestic investors shunning government bonds while foreign investors are desperate, but can’t invest because of limits. We really need to open this up to FIIs to a much higher extent – I’d say $100 bn for starters.

Next week’s 13,000 crores. Let’s see how that goes.