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Fixed Income

Weekly Government Bond Auction Devolves For First Time Since May 2011, Second Biggest Ever

RBI’s weekly auctions of government securities hit a snag today. Out of the 15,000 cr. for sale today, over 3,500 cr. worth of bids weren’t accepted, and they devolved on primary dealers (PDs). PDs will pay up and buy these bonds instead.

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Also read: Strange Things are Happening in the Liquidity Bazaar

In a very strange twist, the bond market rallied massively after the auction, with the 2023 bond ending at 7.93% (a lower yield=higher price). Reportedly, because the Prime Minister said this could be a temporary move. (See Note below)

This is the second worst devolvement ever, since data is available (from 1995).

Top 5 Devolved Auctions: Capital Mind

Source: RBI

Remember that before April 1, 2006, all unsubscribed bonds (devolvement) was bought by RBI and then offloaded at an opportune time. The FRBM act since disallows the RBI from participating (thank goodness).

And then, this is looking like a tough time for G-Sec auctions:

Devolved Auctions by Fin Year: Capital Mind

Source: RBI

If the liquidity situation remains tight, further bond auctions will be quite tough, but they have to be – the government will have to accept having to pay higher rates.

While 23.5% of the auction today devolved, it wasn’t really the worst devolvement, even if you consider the post-FRBM period.

Top 10 by % of Auction Failure: Capital Mind

Source: RBI

Note: What Manmohan Singh said was:

The Reserve Bank has done its bit to stabilise market expectations. Initially it injected dollars into the market. This helped to some extent. More recently, it took additional steps to raise short term interest rates. These steps are not meant to signal an increase in the long term interest rates. They are designed to contain speculative pressure on the currency. Once these short term pressures have been contained, as I expect they will be, the Reserve Bank can even consider reversing these pressures.

Manmohan Singh is the prime minister, but he can’t really control what the RBI does. So this is largely wishful thinking. If the rupee remains close to the 60 level, as fundamental pressures seem to indicate they will, it’s difficult to see a reversal of these measures.

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  • dheeraj says:

    I don’t think the rally had anything to do with Manmohan’s speech.
    Frankly, does anybody care about what he says?
    He spoke in the morning and the market didnt react the whole day. It was only after the auction results that the rally gathered steam. The devolvement on Primary Dealers was a clear signal from RBI that they’re not comfortable with higher yields. Their other moves over the week (like rejecting all bids in the T-bill auction) has only reinforced this view.
    And don’t worry too much about Primary Dealers. They are the ones who are laughing all the way to the bank. Not only did they get handsome commissions for this auction (well above 90 paise per Rs. 100), the market rally post auction has ensured that they get a phenomenal return (as much as 1.5% -2%) for their underwriting.
    And if they’ve sold off their entire devolvement they wouldnt need to deploy any capital too.
    Who wouldn’t settle for something like that?

  • Jose says:

    The Bond market rallied on RBI just announcing the cut off yields, they announced the Bid Vs acceptance post market closing. Also in the closing minutes RBI came in to support the Rupee on expectation of a crash in the bond market. The Forex Reserve came in @ $280 Billion same as Last month, cushioned the Forex markets. We must see the Bond market devolvement shivers on Monday as market opens. Unless markets discounted this ahead ? The G20 meeting is happening in Moscow now, so all global fall is planned for Next week 🙂

  • Kaka says:

    a) As an economist, the PM should know that the RBI should be independent and not interfered with. So, why is he commenting on what they may or may not do?
    b) His comment is of the same bent as what has been coming out of the RBI on inflation for the past 4-5 years. ‘Inflation will come down next quarter’. So, expect the PM’s projections to be similarly wrong. Although, the point should be that regardless of whether he is right or wrong in his projections, why is he making projections anyway?