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Bonds Lose 3%-7% on RBI Stance Change. Auction Failure Likely?


Bonds have fallen substantially in two days, losing up to 7% in the misery that market participants have felt after RBI turned the knob from “accomodative” to “neutral”.
Longer term bonds were the most hit, with big losses coming in bonds as far as 23 years ahead. Bond Losses
These are MTM prices from CCIL. Some bonds are thinly traded so they don’t seem to lose much but the difference is visible only when you come to the market to sell, I guess.
And then, the RBI is going to have an auction for government bonds today. The underwriting auctions show a 20 bps commission for the longer term bonds – this means someone is asking the government for 0.2% to be able to sell these bonds. That’s much higher than the average 6-7 bps that is demanded.
Usually when underwriting fees go up, auctions fail. Meaning, not enough buyers emerge, and then the underwriters have to buy the bonds in their own books (thats why they charge a fee).
Then, they have to sell these bonds in the market. Which, when the demand is low, means they will sell at a loss; the underwriting fees attempt to cover that risk.
Underwriting AuctionsYour bond funds have been hurt, as spreads have widened substantially. However, foreign investors seem to now be interested in bonds, so are starting to buy (but they are smaller players)
Also it’s important to note that as cash flows back into the system, bank deposits will reduce. And banks will sell bonds that they had stored as SLR against those deposits. Given that bank deposits are falling by about 30,000 cr. per fortnight or more, we should see some impact through bond sales, especially after March 13 when SB account gates will be opened fully.
As bond yields rise, interest rates for the economy rise too. This is happening worldwide, in a small way. The change will be slow, though it does seem to mean a turn in the interest rate cutting cycle for India now.


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