The government?s market borrowing programme ended on a high note on Friday as the last bond auction for FY14 saw strong demand and cutoff yields were lower than previous auctions.
The Reserve Bank of India (RBI) sold three bonds, including the benchmark 10-year bond, for a total of Rs 10,000 crore at the auction on Friday. The cutoff for the 8.12%, 2020 bond at 9.02% was lower than the previous auction. The cutoff yield on the benchmark 8.83%, 2023 bond was 8.73%, the lowest since it was issued in December.
This is in contrast to the previous 10-year benchmark 7.16%, 2023, that was issued in May 2013 and resulted in losses for investors. The cutoff yield for the bond was higher in every auction after its first issue. Bond dealers said that yields could ease further in the secondary market in the coming weeks due to absence of more supply. The yield on the 10-year benchmark 8.83%, 2023 bond is expected to ease to 8.60% by March.
?One cannot expect a big movement in bonds, but there will be a positive movement,? said HDFC Bank head of trading, Ajay Marwaha. Bond investors saw their portfolios suffer huge losses in 2013 as yields surged after foreign institutional investors started dumping Indian debt in May. The yield on government bonds had shot up over 90 bps between May and August as FIIs sold $14 billion worth of bonds after the US Federal Reserve indicated it would begin cutting back its monthly bond purchases.
FIIs anticipated that the Fed?s move would reduce global liquidity and, thus, leave them with less funds to invest in emerging market assets. Moreover, the RBI?s unexpected measures in July to tighten systemic liquidity to curb speculation in the exchange rate market also hit the bond market and sent yields north.
In July, the central bank capped banks? borrowings from the daily repo tender at 0.5% of deposits and also hiked the Marginal Standing Facility rate by a massive 200 bps to 10.25%. This effectively reduced banks’ access to cheaper liquidity and prompted investors to trim their bond holdings.
?The year 2013 was not good for bonds because of FII selling and RBI?s measures. But there has been some rally lately, which has helped bond portfolios a lot,? said a bond trader with a public sector bank. The yield on the then benchmark 10-year bond 7.16%, 2023 surged 50 bps following these measures. As selling by FIIs continued through November, bond yields rose by a further 70 bps.
?I think the 7.16%, 2023 bond is an exception. Most benchmarks have performed well,? said Marwaha.
Bond auctions during this period saw cutoff yields rising for most bonds in line with the secondary market movement. However, there was no development at any auction. Since December, FIIs have been net buyers of bonds, which has helped bring down yields in the secondary market. As the financial year comes to a close, bond investors are likely to see gains in their bond portfolios as yields ease further. But it remains to be seen whether the government’s borrowing cost for 2014-15 will come down.
