The benchmark bond yields pierced the psychologically important 8 per cent mark for the first time since December 2014 sparking fears of a faster rise in borrowing cost after the Reserve Bank of India’s first rate increase in more than four years.
The benchmark bond yield surged to as much as 8.03 per cent on Friday pulling prices down. It erased early losses to close at 7.95 per cent. The gauge last crossed 8 per cent on December 17 nearly three and a half years ago.
“Debt market opened weaker amid overnight turmoil in emerging markets and high crude oil prices,” said Naveen Singh, head of government securities trading at ICICI Securities Primary Dealership. “But the surprise buying around the RBI’s weekly auction caught the market off-guard. Bond yields erased initial losses to close stronger.”
In the RBI’s weekly bond auction, only a few large state-owned banks seem to have placed aggressive bids. For example, 10-year bonds worth 74,000 crores was up for sale where the central bank received 230 bids, but just three bidders were allotted because of lower yields. Similarly, a single bidder obtained the entire 27-year series for3,000 crore where RBI had received 84 bids.
Globally, emerging markets have been in turmoil for a few months now especially after signals from the US that the Federal Reserve may step up its pace of balance sheet shrinkage and rate hikes after faster-than-expected economic growth.
Turkey tightened monetary policy Thursday for the third time in less than two months while the central bank of Brazil sold extra foreign-exchange swap contracts for the second time this week, a move billed as a shield against sharp decline in the local currency.
“There is little appetite with domestic banks to buy incremental G-secs,” said Pradeep Khanna, head of trading, Global markets, HSBC India. We are experiencing lower volumes in the secondary market.”
“You need tremendous overriding domestic factors to push Indian yields down when globally interest rates are heading up. We do not seem to have that,” he said.
Yields may rise another 10-15 basis points in the next few days, pushing up the government’s borrowing cost, dealers said. Bond yields and prices move in opposite direction.
The RBI in its bi-monthly monetary policy has changed norms for valuing state bonds. The latest norms on the treatment of markto-market treasury losses came as a welcome surprise to Indian lenders but it is expected to push up the bond yields with some banks facing prospects of substantial value erosion on their investments in state-government bonds.
Yields on state bonds have risen five bps after the RBI policy
Source: economictimes.indiatimes.com