Healthy PIB appetite - sustainable?

Dealers swarmed the eighth PIB auction of the current fiscal year like kids in a candy store. The auction held two days back received twice as many bids as envisioned in the pre-auction target of Rs20 billion.
The two favourite picks, 3-year and 10-year maturity bonds, together pulled in nearly 85 percent of the total auction participation. Since the discount rate has remained unchanged in the past three monetary policies, yields demanded on the bonds have been declining.
The lowest bid placed for the 3-year and 10-year bonds in the latest auction fell by 5bps and 2bps, respectively, compared to the last auction held in April, according to data provided by a money market dealer to BR Research.
Eyeing lucrative bids, the government collectively sold Rs28 billion worth of bonds, and rejected bids for 7-year and 30-year bonds. Moving in tandem with market participation, the sale of 3-year and 10-year bonds accounted for nearly 90 percent of the total amount raised.
This time the government accepted a bid each worth Rs100 million for the 15-year and 20-year bonds. "On account of corporate buying pressure, the lowest bid for the 15-year bond was around 14.11 percent, nearly 40 bps point lower than the lowest bid placed in the previous PIB auction," revealed the dealer.
Given this scenario, the cut-off yield for the 3-year, 5-year and 10-year bonds remained static at 14 percent, 14.06 percent and 14.10 percent, respectively.
An improvement in PIB demand, as seen in 2HFY11, is a good omen, after the surge in the interest rate at the start of the fiscal year stalled the markets appetite for PIBs during the 1HFY11, when investors drifted towards shorter tenure papers to avoid price risk.
Consequently, the government sold just Rs27 billion worth of PIBs against the pre-auction target of Rs85 billion in the 1HFY11. This not only caused distortion in the public debt market but also lifted borrowers rollover risk.
Interest rate stability has brought the demand for longer tenure papers and PIBs back on track during 2HFY11, lowering the governments rollover risk, ever so slightly.
But, considering the prevailing economic conditions, the real ticking bomb is the uncertainty on the macroeconomic horizon. If the lack of political will and commitment to streamline fiscal issues continues unabated, investors interest may again turn to shorter tenure papers in the quarter ahead.