Bonds fall sharply; Rupee ends weak

MUMBAI: Government bonds
fell sharply for the second time this week, after the Reserve Bank of India (RBI) bought back bonds from traders at
yields much higher than what market expected.

The next clues for the market will come from the Rs 12,000-crore bond sale scheduled on Friday, which traders expect will sail through. RBI said on Thursday it had fixed an underwriting commission of 3-8 paisa for the three bonds offered (against 5-15 paisa routinely). This indicates that bond houses underwriting the auction are hopeful that they will not have to buy a very large amount of unsold bonds.

The central bank said on Thursday it had bought back bonds worth close to Rs 2,700 crore through an auction under its open market operation where it received bids totalling Rs 8,500 crore.

It bought back the 7.59% bonds maturing in 2016 at a cut-off price corresponding to a yield of 7.18%, higher than the market expectation of 7.15%.

This was the central bank’s third purchase this month. Till date, it has bought only Rs 43,000 crore of bonds since April 1, against its target of Rs 80,000 crore for the first half of the fiscal.

“From a fundamental perspective yields seem to have overshot expected levels,” said Arvind Chari, debt portfolio manager at Quantum Mutual. “It will not be rash to expect bonds to post a rally of sorts from hereon (in the medium term.) Then there is the central bank which is expected to intervene actively through OMOs to keep yields from going haywire,” he added. When yields fall, prices rise.

Traders are now wondering if this is just an one-off announcement or whether buybacks will be a weekly event. The government will also sell bonds worth Rs 12,000 crore this Friday. The rupee ended flat at 48.91 against the US dollar on month-end demand for the US currency despite upswing in stocks. It closed at 48.93 against the dollar on Wednesday. The dollar rose on Wednesday as reports that China would restrict investment renewed concerns about a global recovery data showing a jump in new US home sales.