[Investors Please Listen] Auction cut-offs and devolvement sustain investor pessimism; 10-yr up 11bps

Auction cut-offs and devolvement sustain investor pessimism; 10-yr up 11bps

• The 10-year benchmark paper soared 11bps today to close at 6.73% (highest since April 13). Investor pessimism seemed well ingrained in the government bond market as yields trailed consistently higher for most of the day; the curve drifted up by 5-10bps. Total volumes on the NDS-OM platform stood at INR 63.95 bn.
•  The INR 150 bn auction turned a catalyst for the ongoing bearishness, reporting cut-offs worse than expectations along with the devolvement in the longer dated securities. The 7.59% GoI 2016 bond was the most liquid counter, auctioned today at a cut-off yield 10bps below (at 6.94%) market expectations.
•  Liquidity in the system remained plush with excess cash under the RBI's reverse repo holding at INR 1.33 tn. Total volumes in the overnight money market were marginally held back from the INR 1 tn mark (at INR 969 bn) at a weighted average return of 2.84%.
•  The INR 150 bn auction concluded with this financial year's maiden devolvement – INR 3.71 bn of the 26-year bond (7.40% GoI 2035) bought by primary dealers. Cut-off yields for all securities, barring the 7-year paper, were issued at much higher (4-5bps) yields than market expectations.
• Annual Wholesale Price Index (WPI) for the week-ended May 16 rose 0.1%, reporting a Y-o-Y inflation of 0.61%. Prices of tea (up 10%), select pulses (up 1% each), aviation turbine fuel and furnace oil (up 2% each) held an upside on wholesale prices; the annual inflation unchanged from the previous week.
• Yields on the PSU 5 and 10-year corporate papers rose 10bps each, while select participants were also seen selling 2-year papers. RPL continued to take recourse to CPs, raising another INR 3.50 bn at 4.25% (up 15bps) in the 3-month segment.

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