Weak bond auctions flash warning on India record debt sales

The Delhi Stock Exchange building is seen through the windshield of an auto rickshaw in New Delhi, India. (Bloomberg pic)

MUMBAI: India is struggling to sell its bonds at recent auctions, and that’s even before Prime Minister Narendra Modi embarks upon a record borrowing programme.

Underwriters rescued a longer-tenor bond sale on Friday following poor buying support that’s seen the bid-to-cover ratio – a gauge of demand – drift lower in the last two auctions from levels seen in January.

Concerns about an over-supply of longer maturity bonds have increased after the government on Feb 1 said it plans to borrow almost US$100 billion for the year starting Apr 1.

At the same time, the nation’s sovereign yield curve has steepened after the central bank sprung a surprise rate cut two weeks ago and left the door open for another reduction as early as April.

“There’s been poor demand from banks and investors at the longer end of the curve,” said Kuldeepsinh Jagtap, senior vice president at ICICI Securities Primary Dealership.

“Longer-end bonds may continue to see relatively poor bidding till the borrowing calendar for the first half of fiscal 2020 is announced.”

The deteriorating fiscal outlook, a heavy supply of government bonds and a slowdown in the pace of bond buybacks are expected to lead to a higher risk premium at the long-end of the curve, HSBC Holdings said in a note.

The bank is “mildly bearish” on local sovereign bonds, and forecasts the 10-year yield to rise to 7.5% by end-June.

The yield slid 3 basis points to 7.34% on Wednesday.

The yield on the most-traded 2028 sovereign bond has climbed 17 basis points since the year started, raising borrowing costs for the government.

The next auction is due on Feb 22.

Investors are also contending with an increased supply of state debt.

The Reserve Bank of India will sell up to 2.26 trillion rupees of bonds in the January-March period, more than market expectations of up to 2 trillion rupees, according to Edelweiss Securities.

“The key positive is a more dovish RBI, but support for bonds won’t extend beyond the one-two year tenors,” Eugene Leow, a rates strategist at DBS Bank in Singapore said.

Oil prices rebounding to a three-month high of US$55.9 a barrel is another negative, and if they hold at those levels, or advance, could dash market expectations of an April rate cut.

“It is a small dampener perhaps,” said Leow.

“I would get more worried when Brent crude prices are closer to US$75 a barrel.”