Due to weak long-term gilt demand at today's weekly auction, government bond prices finished considerably lower, forcing the Reserve Bank of India to set lower cutoff prices than anticipated, according to dealers.
The 10-year benchmark 7.26%, 2032 bond closed at 99.70 rupees, or 7.30% yield, against 100.02 rupees, or 7.25% yield, on Thursday.
At the weekly auction today, the government sold 90 billion rupees of the 7.36%, 2052 bond, 120 billion rupees of the 7.26%, 2032 bond, and 70 billion rupees of the 7.38%, 2027 bond.
"The market had expected strong demand at the auction by way of bullish bidding, however, the results came in otherwise," a dealer at a state-owned bank said.
Some dealers had anticipated the RBI to set cutoff prices above the prior closing levels on the bonds at auction given demand from institutional investors and short sellers covering their wagers.
However, the bid-to-cover ratio for the auction was a low 2.34, with that for the 10-year benchmark 7.26%, 2032 bond below 2. Typically, a bid-to-cover over 2.5 indicates firm demand.
The 5-year overnight indexed swap rate rebounded from its day-low of 6.24%, which also contributed to the significant decline in gilt prices. After market hours today, the five-year swap rate increased by 8 basis points to 6.38%.
Initially, traders were paid at predetermined rates. However, as rates reached levels thought to be lucrative, they paid fixed rates, according to dealers, which drove up OIS rates.
Gilt prices were pulled lower as traders trimmed their bond holdings to book profits ahead of the weekend, uncertain about upcoming cues, dealers said.
Gilt prices fell as traders reduced their bond holdings to book profits before the weekend because they were unsure of the direction of the market, according to dealers.
The demand for the 5-year benchmark bond was higher than those of longer maturities as traders eyed the sharp spread between the gilt's yield and the 5-year OIS rate, dealers said.
The RBI set the cutoff price for the 7.38%, 2027 bond at 101.06 rupees, slightly higher than 101.02 rupees seen in an Informist poll.
Traders had speculated short sellers may have covered their bets at the auction in the on-the-run 7.38%, 2027 and 7.26%, 2032 bonds and had little appetite to buy gilts after the debt sale, dealers said.
Some traders were of the view that the 10-year benchmark 7.26%, 2032 bond would be well bid by insurers, who have been stocking up on the 10-year benchmark gilt over the past week as well, dealers said.
"The 10-year bond's cutoff yield will go hand in hand with Deposit Insurance and Credit Guarantee Corporation demand, because banks won't have enough demand," said a dealer at a state-owned bank. "They'll try to get the bond at below par (100.00 rupees) at the auction."
However, the demand for the 2032 bond wasn't as strong as the market had expected as state-owned banks demanded higher yields to replace the government security holdings they trimmed on Thursday, dealers said.
Public sector banks were the top net sellers on Thursday, selling 62.49 bln rupees worth of gilts in the secondary market, according to data from the Clearing Corp of India.
Towards the end of the day, rising US Treasury yields and crude oil prices during the European market hours kept traders from stepping up purchases despite the fall in prices, dealers said.
The 2027 bond's price, which had done well during the auction, fell due to the negative emotion, while the 2032 bond, which was the most actively traded at 7.26%, closed close to the day's low, according to dealers.
Losses, however, might be contained moving ahead as investors are anticipated to increase purchases after the benchmark 10-year yield surpassed the 7.30% level, which had sparked periods of purchasing over the previous two weeks, according to dealers.
Data from the RBI's Negotiated Dealing System - Order Matching platform shows that today's market-wide turnover was 324.80 billion rupees, down from 379.80 billion rupees on Thursday.
In contrast to the 4.05 billion rupees in 37 deals on Thursday, trades totaling 2.90 billion rupees were concluded with the pilot digital rupee today in 30 deals.
