Bond traders take a hit as yield jumps
On the day of the auction itself, the yield rose to 7.87%. Bond prices and yields move in opposite direction.
On the day of the auction itself, the yield rose to 7.87%. Bond prices and yields move in opposite direction. “The cut-off was far more aggressive. Investors did not find the yield attractive enough. And when traders saw lack of buying interest, they panicked and decided to cut their losses and sell their investments,” said Pradeep Madhav, MD, STCI, a standalone primary dealership firm.
Sale of the first tranche of 10-year bonds at the beginning of a fiscal year draws a lot of interest since that becomes the most traded security among various government paper. It also serves as the benchmark. This time around, the cut-off yield is not profitable as interest outlook is changing by the day. With inflation as measured by the wholesale price index at 9%, a full 100 basis points above the Reserve Bank of India’s forecast, interest rates have to be raised that would push the value of existing bonds down.
“Last year, when the 10-year paper was issued, the coupon rate was fixed at 7.80%,” said a bond dealer. “After a year, when there is high inflation and interest rates have risen by 250 basis points and the yields are northward-bound, to have such an aggressive bidding was absurd.” The government has front-loaded its borrowing programme with 64% of the total happening in the first half of the year.
The government will borrow Rs 2.5 lakh crore in the first half (April-September) this financial year 2011-12. Net borrowing for the first half of the year is pegged at Rs 1.9 lakh crore. As much as Rs 37,000 crore worth of government bonds will come up for redemptions between April and July, which gives the RBI the space to be aggressive with its bond auctions in that period.