Banks and Primary Dealers that have been underwriting government bond auctions have been getting great commissions recently. They have now earned over Rs. 440 cr. as underwriting commissions since 18th July 2013.
Yes, they do take some risk, of the bonds devolving (and when they have to buy them if not enough bids are taken in the auction, and then attempt to sell in the market for a profit). This devolvement can result in losses.
Let’s see how the auctions have gone recently, including auction commissions, how much devolved and auctioned amount sizes.
The biggest devolvement (and highest commissions of 85 bps) was on July 18. After that, commissions have remained high, and the latest (for the Sep 23 auction of 15,000 cr.) is a 20 basis point commission on average.
Commissions till June 2013 have averaged around 1 bps (0.01%).
Does this mean we see a default on the bond auction on Monday? Remember, the auction follows yesterday’s rate hike after which bond yields fell from 8.15% to 8.52%.