Markets

How bond houses rescue RBI auction Friday

MUMBAI: Bond houses have salvaged Friday's government bond auction by buying unsold sovereign securities worth Rs 2,325 crore amid falling bond prices.

This is one of the biggest devolvements in the year intensifying the bear market sentiment with rising bond yields, dealers said. Bond yields and prices move in opposite directions.

"The bond devolvement has added to bear-market sentiment," said Naveen Singh, senior vice-president at ICICI Securities Primary Dealers. "The bond market has already been going through a bear phase with rising yields."

The Reserve Bank of India proposed to sell Rs 15,000 crore worth of government bonds including four categorities of securities. One of those was floating rate bonds with seven-year maturity for Rs 3,000 crore.

The floating rate paper is supposed to be "semi-liquid" in the secondary market as these set of securities cannot find buyers and sellers easily, dealers said. Primary dealers or bond houses, which have mandatorily bought the unsold stock may find it a bit difficult exit their holdings.

The central bank could have exercised the green-shoe option, which enables RBI to shift about Rs 1,000 crore worth of securities from one particular category to other categories when bids submitted are not perceived to be reasonable, they said.

In the past one month the benchmark yields has surged about 28 basis points pulling prices down. It jumped six basis points Friday to 7.27%, the highest close since July last year.

"The latest rise in the benchmark yields may have been caused due to different market expectations," said Badrish Kulhalli, head of fixed-income at HDFC Standard Life Insurance. "The authorities are likely to have received bids seeking higher yields, with which they may not have been comfortable. It has finally devolved on primary dealers."

With rising bond yields, some banks are said to be incurring huge mark-to-market losses. This should reflect in their quarterly earnings October-December. Those banks, already embattled with bad loan losses, may see extending losses.

RBI has marked four more categories of bonds for next week auction for Rs 15,000 crore. One of those securities include a 29-year maturity paper.

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