RBI turns to uniform pricing to sell bonds drawing few buyers

Mumbai: India late Monday tweaked the auction method for a series of difficult-to-sell bonds, bringing in a uniform price threshold that will apply to all bidders. The move is aimed at preventing a spiral in debt costs in a year in which the government intends to borrow more to support growth, pushing back the milestones on fiscal rectitude.

“This will allay ongoing market apprehension as bond dealers can now put up bids without concerns of losing out,” said Soumyajit Niyogi, associate director at Indian Ratings. “This should also pre-empt any potential dilemma amid rising global yields.”

The benchmark bond yield Monday rose six basis points to 6.20% after the central bank bond auctions faltered the past two weeks amid rising global yields. In the past two weeks, the gauge surged 26 basis points.

A basis point is 0.01 percentage point.

The set of bonds that will face uniform price auctions carries a coupon of 6.22%, and will mature in 2035.

The authorities are likely to use the uniform method for the first time in the past six-seven years instead of multiple price auctions that gained currency lately.
More than a week ago, papers worth Rs 11,000 crore devolved on primary dealers in a weekly auction as the central bank could not find bidders at reasonable rates.

“With uniform price auctions, the government may be attempting to ensure that market participants show healthy bidding interest,” said Dhawal Dalal, CIO-Fixed Income, Edelweiss Mutual Fund. “The objective is to ensure that market participants get back to the bond market and start bidding responsibly amid a recent spike in global bond yields and subdued sentiment.”
To be sure, three other sets of sovereign securities slated for auction this Friday will follow the same multiple price method.

If a dealer bids for papers at 6.60% but the cut-off yield above which none will receive allocation comes at 6.70%, the first dealer will have to face a loss of 10 basis points compared to another dealer that bid at the threshold limit. This is the prevailing mechanism under the multiple price method.
The uniform price auction will permit allocation of papers at the cut-off bid, prompting many participants to bid aggressively.

US Treasury benchmark yields soared 25 basis points to 1.34% in February. They are up from a record low of 0.52% hit in August.