Amid global rout, govt cancels last bond auction of FY21

In the state of the economy report, the RBI said bond vigilantes could undermine the recovery, unsettle financial markets, and trigger capital outflows from emerging markets.

In a relief to the bond market, the government has canceled the last bond auction of the current financial year, scheduled on March 26.

The government had planned to raise Rs 20,000 crore through the auction, but the Reserve Bank of India (RBI) notified on its website that it stands canceled now “on review of the position of cash balance” of the government.

This was not entirely unexpected by the market, said a bond dealer, as there were rumors in the market already that the last auction would be canceled.

The bond market had a scare last week as a short-term bond was quoted at a yield of (-)1.5 per cent, which meant the bond was offered in the market for a face value of more than Rs 100.

It turned out to be a case of a fat finger, and the trade was not executed.

But the market is under pressure to cover their short positions for which they need to buy bonds.

Coupled with the cancellation of auctions, this should be good news for the market, and the yields should fall more.

The 10-year bond yields closed at 6.18 per cent on Monday, from their previous close of 6.19 per cent.

The present level of yields makes the bonds attractive from a buyer’s perspective, according to Dhawal Dalal, chief investment officer, fixed income, Edelweiss Asset Management.

The yields on the 3-year, 5-year and 15-year benchmark government securities have risen by 55 to 75 basis points since Jan 1, while the yield of 10-year government securities rose by about 30 basis points.

The yields have risen after the government announced in its Budget that for the next financial year, it will borrow Rs 12 trillion once again.

Already, between the states and the centre, about Rs 23 trillion of bonds have been issued in the market, dampening the demand.

The sharp increase in yields, despite RBI’s bond purchase support, may have come as a surprise to certain sections in the market, but the surge in yields “is mostly driven by weak sentiments in the bond market and higher US Treasury yields and are not due to an adverse change in the macro-economic landscape or any change in demand-side factors," Dalal said.

The 10-year US treasury was at 0.5 per cent in early August 2020, but has moved up to 1.67 per cent now, after touching a recent high of 1.73 per cent.

In India, the benchmark 10-year yield, which had averaged 5.93 per cent during April 2020-January 2021 surged to 6.13 per cent on February 2 on the announcement of the market borrowing programme of the central government and has largely remained at those elevated levels, barring a few days when it dipped back below 6 per cent on RBI measures.

The RBI on Friday blamed the bond market for risking the economic recovery.

In the state of the economy report, the RBI said bond vigilantes could “undermine the recovery, unsettle financial markets, and trigger capital outflows from emerging markets.”

For the Indian bond market, in particular, the report said: “The Reserve Bank is striving to ensure an orderly evolution of the yield curve, but it takes two to tango and forestall a tandav.”