The Reserve Bank of India (RBI) rejected all bids for the 5.85% 2030 bonds at a weekly bond auction on Friday, sending yields lower. The yield on benchmark 10-year government bonds fell 2 basis points (bps) to 5.99%.
RBI sold ₹12,200 crore of bonds, less than the ₹26,000 crore planned. It sold ₹3,090 crore of new 2023 bonds at a cutoff yield of 4.26% versus the estimated 4.34%. It also sold ₹9,117 crore of 6.76% 2061 bonds at a cutoff yield of 6.87% versus the 6.82% estimated.
Bond dealers say RBI cancelled the auction of the 10-year bond as it did not accept the yield that was quoted by market participants.
“The 10-year bond was quoting at around 6.035% in the morning. Since it was a large amount, RBI didn’t want to sell the bond at a high yield. If they had devolved, then the underwriters would have sold at a higher yield, which would have sent out a signal that RBI is fine with higher yield,” said the treasury head of a bank.
Last April, RBI had similarly refused to sell the 10-year bonds, which led to a fall in yields. At that time, primary dealers had shorted the 10-year bond in order to cover it ahead of the auction.
The short-selling involved borrowing a security and selling it in the market, hoping to buy it back at a lower price later. However, market participants were taken unawares when RBI decided to cancel the auction instead of devolving on the primary dealers, thereby cooling off the yield.
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