The not-so-successful, recent PIB auction marks the end of a three-month hard bargaining bout between the bond issuer and the lenders. The government, after playing hard ball with financial institutions - as it rejected all bids invited in the first two PIB auctions held in FY11 - finally decided to meet them halfway in the third auction.
With the inflation genie out of the bottle and growing trepidation about an interest rate hike, primary dealers have been placing higher bids since the onset of the current fiscal year.
At the same time, market appetite for bonds also pales in comparison to Treasury Bills - with investors sloshing money into short-term securities to play down the interest rate risk. Therefore, in an all-out effort to price bond out of the market, the seller rejected all bids in the first two PIB auctions.
As it is difficult for the government to stick to its guns for a longer time, this time, it partially acquiesced to market offers in the face of higher yield and tepid participation.
The auction garnered bids worth around Rs17 billion, compared to the pre-auction target of Rs20 billion, out of which it awarded bids worth around Rs6.38 billion. Bids worth around Rs4.86 billion were accepted in the 10-year tenure, where a majority of the participation was concentrated. The government rejected the bids for the 7-year, 15 year and 30-year papers.
Demand for 10-year bonds are always in vogue as it is considered a benchmark security and are highly liquid. Moreover, in the secondary market, PIBs with the remaining maturity of 9 years are currently trading at a lower yield than those with a remaining maturity of 3-8 years, a phenomenon which dealers link to limited supply of the 10-year paper.
Some attribute this anomaly to continuous trading in papers of nine year maturity, which makes its price discovery more efficient than bonds of other tenures. Despite fresh supply of new 10-year bonds, the market believes that demand will remain intact as around Rs3 billion worth of benchmark papers were purchased by a single insurance company in the latest PIB auction.
However, the market sold auction short, saying that the government missed out on a chance to get cheaper finance in the last two auctions with a cumulative target of Rs45 billion. This can be gauged from the fact that the lowest bid placed in 10-year bonds in the latest auction was nearly 65 basis points higher compared to the lowest bid placed in the auction before.
In a nutshell, the acceptance of bids will give a little breather to the bond market that became direction-less after the refusal of bids in the first two auctions - as it will provide true market information to develop a credible yield curve. However, investors are aiming at relatively more successful PIB auctions in order to make the bond market more efficient.