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Fixed Income

Biggest Bond Devolvement of 2013 at Rs. 4,000 cr. Makes This the Worst in 12 Years

The 15,000 bond auction devolved over 25% today – that is, there weren’t enough bidders on the bonds and primary dealers HAD to buy it (they had underwritten the issue yesterday). Here’s quick look at how not getting subscriptions for over Rs. 4,000 cr. worth of bonds is noteworthy:

It’s the biggest absolute default (in amount) since the liquidity squeeze by the RBI in July 2013:

Recently Devolved Auctions

It is also the biggest failure by percentage devolved (in a single auction) since 2006:

Top 10 devolved auctions by % failure

And it catapults 2013-14 into the biggest devolved year (as a % of total auctions) since, hold your breath, 2000-01.

Devolved Amount by Financial Year

We have seen a devolvement of over Rs. 16,000 cr. of a total issue of Rs. 329,000 cr. since April 1, 2013; this is big, but you have to note that the economy has grown a lot since:

Devolved Auctions by Fin Year Absolute amount

Note: there are four more auctions this week:

  • Tuesday: Rs. 9,000 cr. of state loans, and 1,000 cr. of Inflation Indexed Bonds (IIBs). IIB underwriting went at 87 bps, which means some of that will default as well.
  • Wednesday: Rs. 12,000 cr. of T-Bills.
  • Friday: Rs. 14,000 cr. of government bonds.

Impact: Bond devolvement means the higher prices are what the markets desire. Already the market yield for these securities went higher, and bond prices are 1.5% to 2% down. These will impact banks and primary dealer – who will see lower prices on their government bond holdings, and who will have to hold these bonds if they are devolved.

Banks will hurt, as will us taxpayers (who pay higher interest on government borrowings). This indicates a credit problem, and the RBI might want to intervene in the next auction, through an OMO auction. I think if they do intervene they should sell dollars to keep liquidity constant, so that there is no inflationary risk.

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