Mumbai: The yield on 10-year securities rose to 8.64% on Wednesday, after the Union government said it would auction two long-term papers worth Rs10,000 crore, before closing at 8.62%.
After the stock markets closed on Tuesday, the government announced it would sell Rs6,000 crore of 7.94% 2021 bonds and Rs4,000 crore of 8.28% 2032 bonds, in an auction on 26 September.
On Tuesday, the 10-year paper had closed with yield at 8.44%. Bond yield and price move in opposite directions.
The government had exhausted its first round of market borrowing of Rs96,000 crore and not announced its second borrowing schedule. It plans to borrow Rs1.45 trillion from the market for expenses.
Bond dealers were caught by surprise at the auction announcement as the market already has an acute liquidity shortage. The Reserve Bank of India, or RBI, is infusing some Rs60,000 crore a day into the system for the past eight days.
These bond dealers said there is a shortage of Rs70,000 crore in the banking system and the additional burden of Rs10,000 crore would be bad news for bond yields. RBI on Wednesday injected Rs64,320 crore into the system through two liquidity adjustment facilities.
The central bank lends money to banks by taking government securities from them. To tide over the liquidity situation, the regulator last week offered banks additional liquidity support by allowing them to temporarily keep 24% of their deposits in government bonds, instead of 25%.
The Friday auction is also seen by bond dealers as the government’s way of increasing the supply of papers that banks can later use as collateral for borrowing from the central bank.
They also see signals of a robust inflow of funds soon into the system because of the bond auction.
“I think the rumours of government implementing the Sixth Pay Commission recommendation in the first week of October is coming true,” said a bond dealer with a private bank, who declined being named.
Also, according to bond dealers, the Rs40,000 crore in advance-tax outflow will come back into the system when the government takes money from the auction in its treasury.
Some dealers also said the unexpected announcement on the auction might have been made to stem the fluctuation in bond prices. The yield on the 10-year paper, which was at 9.45% in mid-July, dipped to 8.07% on 16 September.