RBI cancels Rs 11,000 crore bond auction; 10-year yield eases 7 bps to 6.53%

Synopsis

Indian sovereign bond yields eased on Friday. The Reserve Bank of India cancelled a 7-year bond auction. This action led to a nearly seven basis point drop in the benchmark 10-year sovereign bond yield. Traders believe the cancellation signals the central bank's discomfort with higher yield bids. This development follows a period of rising yields since June.

Mumbai: Yields on the benchmark 10-year sovereign bond eased nearly seven basis points on Friday to 6.531% as the Reserve Bank of India (RBI) cancelled the 7-year bond auction scheduled for a notified amount of ₹11,000 crore.

The RBI cancelled the auction as yields bid by auction participants were likely higher than the central bank's comfort level, traders said.

Yields of the 10-year paper were trading at 6.595% at approximately 3 PM, and immediately eased to 6.548% after the auction results were announced, CCIL and RBI data showed. They closed at 6.531%, versus the previous close of 6.573%. "The RBI may not be comfortable with the level of yields in the auction. After this cancellation, long end papers did not react as much as the belly - the 8-15 year papers did - which had a rally," said Vijay Sharma, senior executive VP at PNB Gilts.

"There is also a possibility that the auction was cancelled just to give a signal, and instead of cancelling the longest bond, they cancelled this one, thinking it would have a larger impact on the overall health of the market," Sharma said.

Bond yields have been rising since the June monetary policy meeting, after the RBI cut policy rates by 50 basis points, but also changed its stance to neutral. Yields of the 10 year benchmark government bond hardened in Q2 to reach the highest of 6.64% in late August, versus its lowest at 6.12% in June, CCIL data showed. A similar increase was seen in the ultra long tenured bonds. This hardening of yields caused a decrease in treasury gains for all banks.

"Markets have been falling since Q2, and whatever stock traders have is under mark-to-market pressure. Under such conditions, the markets become disjointed and start pricing in a risk premium, which could be the reason traders bid at higher yields," said a bond trader from a private sector bank.

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