(Bloomberg) -- India's benchmark yield jumped to the highest in two years as demand for bonds at recent auctions dwindled amid concern over the central bank's consistent sales of the nation's debt in the secondary market.
The 10-year bond yield rose five basis points to 6.59%, highest since January 2020. That's after underwriters stepped in to buy nearly 44 billion rupees ($593 million) of 60 billion rupees of the 2026 debt for sale on Friday. The last time underwriters rescued an auction was at end-July.
Market sentiment has soured after the Reserve Bank of India began gradually ramping up its liquidity withdrawal via variable reverse repo operations while also becoming a net seller in the secondary market by offloading over 150 billion rupees of bonds since mid-November. The central bank halted bond purchases in its October policy meeting after buying 2.2 trillion rupees of debt via its purchase program in the April to September period.
The market isn't getting any help in absorbing longer-duration bonds and the RBI is actively adding to debt supply in the market through its permanent liquidity operations, said Suyash Choudhary, head of fixed income at IDFC Asset Management Ltd. There's risk that the market may lose appetite for debt without intervention, he said.
The central bank's reduced support for the bond market is exacerbating stress on sovereign bonds resulting from the rise in Treasury yields. The risk of additional government spending amid the latest wave of Covid infections could further dampen the demand for Indian bonds.
India sold 30% of the 240 billion rupees issuance on Dec. 31 as the central bank chose not to give in to investor demand for higher yields. RBI Governor Shaktikanta Das has repeatedly said he is comfortable with an orderly evolution of the yield curve but that the central bank will step in to prevent sharp spikes.
“The market is way away from equilibrium,” said Naveen Singh, executive vice president and head of trading at ICICI Securities Primary Dealership Ltd. “The global theme is also not supportive as it was in October and November, so tough times continue for the market.”
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