Investors Picked Up Only 40% Of Post-Budget Government Bond Sales

Only 40% of government bonds auctioned by the Reserve Bank of India since the Union Budget and the monetary policy review that followed have been bought by investors as part of primary auctions. The rest have either devolved on primary dealers or the sales have been partially cancelled. This, as the expectation on interest rates between the central bank and the markets continue to diverge.

At Friday’s auction, three of the four securities up for sale were only partially bought by investors, leaving primary dealers holding some of these securities.

• 3.96% GS 2022: Rs 2,715 crore of Rs 3,000 crore devolved.
• 5.15% GS 2025: Rs 5,819 crore of Rs 12,000 crore devolved.
• 5.85% GS 2030: Rs 10,897 crore of Rs 12,000 crore devolved.
• FRB 2033: Government accepted Rs 6,000 crore instead of planned Rs 4,000 crore.

Each auction since the Union Budget has seen some devolvement as investors are demanding higher interest rates on government securities.

Data compiled by BloombergQuint showed that 43% of the bonds auctioned have devolved on primary dealers. Including auctions that were partly cancelled without being devolved, and securities where an additional amount was retained, the total amount raised is just 40.8% of what was up for auction.

In the Union Budget, the government announced that it would borrow an additional Rs 80,000 crore in the final quarter of FY21. In FY22, the government intends to borrow a little over Rs 12 lakh crore.

Elevated supply of government bonds and the fear that surplus liquidity conditions will wind down over the course of the year have prompted markets to bid up bond yields. The 10-year benchmark bond yield rose 6.24% on Friday. It has risen 35 basis points since Jan. 29, before the budget presentation.

The central bank, however, has repeatedly assured markets that it will continue to ensure comfortable liquidity conditions and an orderly evolution of the yield curve. A reversal of a 100-basis-point cut in the cash reserve ratio will give the RBI room to conduct more open market operations and support bond markets, Governor Shaktikanta Das has assured.

The RBI has also been conducting open market operations, while simultaneously buying bonds in the secondary market. None of these factors have convinced the markets.

Investors are expecting the government’s demand for money to go up significantly for spending towards an impending economic revival, and that is keeping them at bay, said Ajay Manglunia, managing director and head of institutional fixed income at JM Financial.

“Further, rising interest rates across the globe, expectation of higher inflation and rising crude prices, are all contributing to a somewhat forced selling of government securities as the market expects the central bank to loosen its pricing further. While the RBI has been easing the yields every auction, investors feel there is more scope for correction and the demand may stabilise only after the rates move up by another 20-25 basis points,” he said.

While fixed rate bonds have been shunned by investors, floating rate bonds have seen greater acceptance.

“There is no doubt that the market is clearly expecting the interest rates to harden and does not want to, therefore, lock their investments at a fixed rate. That is also leading to greater flows for floating rate bonds, considering the bottom of the interest cycle is already behind us,” said Soumyajit Niyogi, associate director of credit and market research at India Ratings & Research.