MUMBAI: Indian government bonds fell on Friday after the central bank did not fully sell its allotment of debt at the 140 billion rupees ($2.29 billion) auction, with the devolvement to traders including the new 10-year bond introduced last week.
The Reserve Bank of India devolved around one-third of the 90 billion rupees in the 2024 bonds that were sold for the first time last week.
Analysts said the devolvement was not a surprise given the RBI had surprised markets by opting to sell the bond, which is soon to become the country's benchmark, for a second consecutive week instead of waiting the customary 2-3 weeks between tranches.
The RBI had also opted for an unpopular method of multiple price auction, which makes investors buy debt at the price at which they bid, even if it's higher and not the cut-off rate.
Traders also noted sentiment was hit by caution ahead of the RBI's policy review next week, even as the central bank is expected to keep rates on hold, and ahead of US monthly jobs data later in the day.
"The devolvement is not a surprise at all," said Bekxy Kuriakose, head of fixed income trading at Principal PNB Asset Management.
"The 10-year paper was overpriced at the auction. It still looks overpriced but the fact remains it is the new benchmark so I expect spreads over the old bond to come down to 15-18 bps over time, but it may not happen immediately," she added.
The existing benchmark 10-year bond yield ended up 3 basis point at 8.75 percent. On the week, yields rose 8 basis points.
The new 10-year paper, the second most-traded security, ended 2 bps higher at 8.52 percent, up 13 bps in its first week of trading after its debut last week.
The details of next week's auction papers, due to be announced post-market close on Monday, are also awaited.
In the overnight indexed swaps market, the benchmark 5-year swap rate closed up 1 bp at 7.90 percent while the 1-year rate ended flat at 8.37 percent.
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