The devolvements have started again! Last week, we saw the bond auction devolve (just a little bit) as the RBI refused to sell at higher yields even though there was demand. Today about Rs. 2700 cr. devolveddevolved, in some very liquid bonds – 2025 (the current 10 year!) included.
Interesting to see that while the 10-year – the 2025 bond – trades in the market at 7.78% the bids seem to have been at higher than 7.81%, and that doesn’t make sense at all. The RBI is basically sending the message here that they will not accept high yields.
The 2034 is scary – because the yield just went above 8%! It’s not even like supply is massive, and the market yields of the 2034 bond as we write this is 7.98%, so there’s a 3bps difference between the auction and the market.
A devolvement means primary dealers have to take the volume and they usually dump it in the market. But consider that yields are LOWER in the market- meaning, prices are HIGHER in the market – compared to the auction there is no dumping going on. (Usually dumping would like to prices falling in the market after the auction)
Devolvement of Government Bond auctions is a tricky process to understand. Last week, we saw a bond devolve, but at the same time, the RBI was buying government bonds (different ones) at even higher yields. Remember, RBI is the merchant banker for the government so it must arrange for an auction so that the government can sell bonds, but it cannot buy those bonds on its own – that is a governance no-no. However, it can buy other government bonds in the market, that are not the exact same ones that are sold in the auctions.
Apparently last week, the government bonds that were sold in the auction devolved because the RBI didn’t want high yields. But the RBI did pay a lot more for bonds in its purchase period (on Monday). This kind of trick – to disallow high yields in an auction but to increase the yield when it buys bonds – is a dirty trick, really. (Imagine if an IPO were to not allow buyers below a certain price, but the promoters themselves sold to some other people at a lower price just a day after the IPO)
Let’s see where the market goes from here; in all probability this is very temporary and just intended to preempt the Fed action next week. But if it’s more sinister it will show up in much higher yields in the market – and currently, that’s not showing.