PIB yields on the rise

The secondary market yields of government securities that drastically fell down right after the scraping of last PIB auctions conducted on October 23 got the pace back after the release of CPI numbers for October. The CPI stood at 9.08 percent versus 7.39 percent recorded in the preceding month.
In the first two weeks of the ongoing month, the secondary market yields of different tenor have hiked by 37 basis points on an average upon the expectations of monetary tightening of 50-100 basis points in the monetary policy announced on November 13. Rightly so, the DR was raised by 50 basis points in the recent monetary policy giving secondary market yields further impetus for a protracted upward journey.
In line with what was already happening in the secondary market, the cutoff yields in the PIB auctions conducted on November 20 settled in the highland. The cutoff yields of 3-year, 5-year and 10-year PIBs marched up by almost 41 basis points, 45 basis points and 40 basis points, respectively, compensating the investors well amid the rate-hike occurred lately.
Subsequent to the rate-hike of 50 basis points, which was the lower-side of the market expectations, the investors bade quite reasonably this time around. The weighted average bid yields for 3-year, 5-year and 10-year papers were 11.9840 percent, 12.5302 percent and 13.0420 percent, respectively against the unreasonably tall bid yields of 12.3814 percent, 12.7509 percent and 13.9727 percent, respectively, witnessed in the last auctions.
The auction participation also remained healthy whereby total bids worth Rs58.27 billion were received against the auction target of Rs50 billion. Seventy-seven percent of the total bids were accepted lending government a reasonable sum of Rs44.97 billion.
While usually most of the participation was skewed in 3-year papers, 10-year papers were also able to attract bids in excess of the auction target which seems an improvement in the development of long-term yield curve.
An upsurge in inflation expected on the back of higher prices of perishable food items is paving way for the discount rate to exceed or at least touch 11 percent by the end of FY14. Market analysts believe the participation in PIB to inch up amid monetary tightening. However, as mentioned earlier in the section, a steep one-time hike in the policy rate instead of a gradual rise would avert the markets bias towards shorter tenor papers and help build the long-term yield curve more efficiently.