Markets show cold shoulder to govt bonds; yields touch 8.78%

10 year government bond yield in India touched a high of 8.78 percent after the highest weekly auction of government bond started today. This was in line with expectation as the government is borrowing almost Rs 18,000 crore this week starting today, the highest ever within such short span at a time when two days of the week are market holidays.

The government offered Rs 8000 crore of bonds at 9.15 percent for 2024, and Rs 4,000 crore 2020 bonds at 8.19 percent. Rs 3000 crore of 2030 bond were offered at 8.97 percent while 2041 bonds were available at 8.83 percent.

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But the bonds did not get a good welcome.The 2024 bonds traded at 8.81 percent after the auction, RBI said. Due to low demand, Rs 319 crore of 2020 bond devolved as did Rs 876 crore of 2030 Bond.

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The RBI had surprisingly announced open market operations of Rs 10,000 crore yesterday which would buy government bonds and also contribute to liquidity in the system. However it bought less than Rs 5,000 crore of bonds and ended up dampening market sentiment.

So where are the bond markets headed for now. PN Vijay, told CNBC Tv18, the government has announced 63 percent of its plans for borrowing in the entire year in the first half itself. So, the present level liquidity is being addressed by the 125 bps (100bps=1 percent) CRR cut and OMOs which RBI is doing, but that at best is a risky operation.

“Over time the bond markets may not touch 9% probably they may touch 9%, but the liquidity in the banking system itself has to improve and that will take a bit longer, so around 8.5%, which is very high by global standards is something that we have to live with at least for the next three-four months,” Vijay said.