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Rising Yield Impact: Bond Auction Flops, Primary Dealers Have to Underwrite 2,600 cr. of 20 and 30 yr Bonds


After the cancellation of the 364 day T-Bill auction on Wednesday, we have further drama in bond markets. The 20 and 30 year bonds, auctioned today for 3,000 cr. each, have failed to get enough bids (or, the RBI didn’t want the government to pay that kind of interest). They have thus devolved on the underwriters, who will have to buy these bonds and find other people to sell them to.


Around Rs. 2,600 cr. of bond have devolved. Which makes it the first “devolving” auction in FY 2016.

We sensed something like this yesterday, when underwriting commissions went up to 4 basis points (0.04%). Typically they are less than 0.01%, but this time, the commissions were higher – only of these two bonds.

Even at 4.5bps, these are nothing compared to the 86 bps commissions we saw in 2013, when bond auctions devolved like crazy. Then too, foreigners were exiting Indian markets.

This devolvement means that primary dealers (typically, banks) would have to own these bonds until they find buyers. Apparently RBI didn’t want the yields to go much higher – a rising yield curve will mean every single bank who owns these bonds have to take mark-to-market hits on their profit as the bond prices fall. But if it doesn’t fall in the auction, it will fall in the market.

You know what this means? It’s just another big round of pressure for the RBI to cut rates. Cutting rates would ease pressure on yields. I wonder if the RBI will give in now or wait till June 2 to make that decision. (Our view, without considering the noise of auctions, is that falling inflation means they have to cut rates, the sooner the better).


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