The last and fourth PIB auction of the first half FY10 came out quite successfully. In sharp contrast to market expectations, and unlike the first two scrapped PIB auctions with third not a runaway success, the fourth auction has smoothly sailed the bond market to normalcy.
Whats astonishing is that investors participated wholeheartedly, and tendered bids worth Rs32 billion compared to the Rs20 billion pre-auction target. This change of tone in the market, can be attributed to improvement in investors confidence, where participation was mainly concentrated in the 10-year bond paper.
With fears of monetary tightening still prevailing, healthy participation depicts that lenders are comparatively comfortable in investing at current yield levels as bondholders can now nail their investments at lucrative rates on account of jumps in discount rate during the past three monetary policies in a row. Moreover, credit for healthy participation also goes to surplus liquidity amid lack of other investment avenues.
Besides, bidders erred on the side of caution, placing modest bids for their favourite pick, as the government took a hard line in past auctions to clamp down on rising bids that is being driven by growing monetary tightening concerns.
Therefore, in the face of 50 bps hike in the discount rate last month, the lowest bid placed for the 10-year bond in the latest auction was nearly 15 bps higher compared to the lowest bid placed in the previous PIB auction held in October.
"By rejecting previous bids the government has petered out the bargaining power of lenders. And, this time, they accepted bids because they got adequate and reasonable bids", according to a fixed income dealer.
With all the cards stacking in favour of the bond issuer, it raised an amount close to the pre-auction target. The cut-off yield compared to the last quarter increased by 35 bps, 30 bps and 26 bps for 3 year, 5 year and 10 year bond, respectively, while the government rejected the bids for 7-year, 15-year, 20-year and 30-year papers.
Along with that, SBPs influence is also putting pressure on the government to honour its commitments announced as pre-auction targets to lessen the inflationary borrowings from the central bank and to ensure a regular supply of long term bonds in the market for the formation of a credible yield curve.
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