RBI rejects government bond auction bids

The Reserve Bank of India has rejected all the bids received in the auctions held today for the sale of "7.46 per cent Government Stock 2017", "8.35 per cent Government Stock 2022" and "7.50 per cent Government Stock 2034".

It plans to announce in due course the revised date of the auction, the details of the securities, the method of auction, the central bank said in a press release. Meanwhile bond yields have fallen dramatically, with the new benchmark quoting at 6.61% after risng above 7% in the course of the day.

"Traders were hoping to sell their bonds to the central bank in OMO and then ask for a higher yield in the auction. RBI has caught them short by rejecting all bids. Naturally yields have collapsed," said a dealer at ICICI Securities.

I don't believe these dealers one little bit. My strong belief is that they decided to hike yields up so they can get bonds cheap - after all, it's a small market, with a few primary dealers, and FIIs won't screw around ($200m cap per FII, only so many care). So if they pushed the market down, as has been happening over the last few days, they could easily get the bonds at far lower prices. They even short sold the bonds so they could buy back in the auction. (You can short sell bonds by borrowing them).

And when RBI rejected all bids, the rush to cover the short sales has driven yields up from 7.27% (2018) to 6.8% at close. (that's a price move of some 3%).

It's now entirely likely G-Secs will be sold later, or RBI will be much more active in the bond market. With deflation likely in two weeks, printing money isn't a bad alternative, to pay those that RBI buys bonds from. But if RBI chooses not to, gilts are going much lower.

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This entry was posted on Friday, March 13th, 2009 at 12:23 PM and is filed under Gilts. You can subscribe to any comments to this entry via RSS 2.0. You can leave a response, or trackback from your own site.