MUMBAI: Indias central bank Friday found no buyers for about a fourth of the Rs 12,000-crore worth of bonds being auctioned, proving thathigher yields on shorter-duration papers are making borrowing difficult for the sovereigns arranger of debt.
Primary dealers of bonds then bought Rs 3,000 crore of federal debt that didnt find takers at the latest weekly auction, marking the fourth incident of devolvement in this financial year.
Investors attribute the unusual shallowness in the debt market to the peculiar gap between short- and long-term bonds. In market parlance, such a skew toward short-duration debt securities is described as an inverted yield curve.
For instance, the cut-off yield below which no one could bid came at 7.76% for 10-year bonds, compared with 7.82% for a four-year series that ultimately devolved on primary dealers. Normally, long-term papers yield higher than short-term papers do.
“There is less demand for shorter maturity bonds,” said Naveen Singh, head of government securities trading at ICICI Securities PD. “The inverted yield curve is making the central bank uncomfortable. The latest devolvement is indicative of that too. The central bank may have to conduct more open market operations (purchases) to correct the yield curve.”
On May 17, the Reserve Bank of India (RBI) will hold an open market operation, or OMO, which is a market mechanism that either sucks out or pumps in liquidity. In the latest planned OMO, the RBI would seek to purchase Rs 10,000 crore worth of government bonds from the market. It was announced last week, prompting yields to fall.
More such moves are now expected from the central bank.
The government bond market has been on a roller coaster in the past two months, with a mix of domestic and external factors triggering major fluctuations in yields. It ranged between 7.13 and 7.78%.
The gauge closed at 7.73% on Friday, a tad up compared to Thursday.
Bond yields and prices move in opposite directions.
In this financial year beginning April 1, shorter maturity papers worth about Rs 8,100 crore have devolved on primary dealers of bonds.