India pulls off first of record bond sales with higher costs amid coronavirus crisis

By Kartik Goyal
India pulled off the first bond auction of its record-borrowing program after paying underwriters almost 50 times more in fees, underscoring how nervous primary dealers were over the deluge of debt.

In the end, the underwriters may have worried excessively. The government sold all Rs 10,000 crores($1.3 billion) of the benchmark bond, with a bid-to-cover ratio similar to its last sale, and a cutoff yield just two basis points above expectations.

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Traders have been jittery heading into the first government auction of the fiscal year after states ended up having to offer much higher yields to get their bonds sold earlier in the week. While Thursday’s sale met with robust demand in the end, the weekly supply of issuances will jump by more than 20%, raising questions over the appetite of investors in the months ahead.

For Suyash Choudhary, head of fixed income at IDFC Asset Management Co., the results are less an indication of genuine demand than a bet that investors will soon be able to resell the bonds to the Reserve Bank of India.

“When the market channel is completely broken, the government is borrowing at a very high cost, which is unsustainable,” said Choudhary. “Market expectation is that the RBI will have to intervene.”

Calls for the central bank to embark on a massive bond-buying program to lower borrowing costs have been growing in recent weeks as the coronavirus outbreak threatens to send the economy into a rare quarterly contraction. The RBI executed a 75 basis points emergency rate cut last month, and also pledged to provide $50 billion of liquidity as the economy shows signs of stress.

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The benchmark 10-year bond yields rose by five basis points to 6.49% on Thursday after climbing about 30 basis points in the previous three trading sessions. Indian markets are shut on Friday for a holiday.

“The current levels of yields, holding at about 200 basis points over the repo rate are very very rare, indicating the RBI will definitely come out with solid action soon” to cap the yields, said Debendra Dash, a Mumbai-based fixed-income trader at AU Small Finance Bank.

High Fees

The administration sold the benchmark 2029 bond at 6.53% cutoff yield, with a bid-to-cover ratio of 2.45 times, similar to the last sale in January. It also sold 50 billion rupees of the new 2022 security at 5.09% yield, and a forty-year note at 7.19%.

The successful sale came with high fees.

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The commission to underwriters to sell the 2029 notes jumped to 6.45 paise per bond with a face value of 100 rupees, from 0.14 paise in the last auction in January, according to a central bank statement. The new 2022 security drew a commission of 1.15 paise, while it came in at 35 paise for the 2060 bond.

Prime Minister Narendra Modi is seeking to sell Rs 4.88 lakh crore of bonds in the six months to September, as the first part of a record-borrowing program. That, along with Treasury bill sales, translates to a weekly supply of at least Rs 45,000 crore of securities versus Rs 37,000 crore in the year-ago period.

Higher bond yields are “counter-productive to the central bank’s efforts to lower interest rates in the bond market,” said Sandeep Bagla, associate director at Trust Capital Services.