Bond yields soar on borrowing hopes

Written by Ashley Coutinho | Ashley Coutinho | Mumbai | Updated: Apr 4 2014, 07:04am hrs
BondThe fixed-income market was closed for Gudi Padwa and on Tuesday due to banks? annual accounts closing. Reuters
Yields of the 10-year government bonds rose by more than 150 basis points on Wednesday in anticipation that the demand would decline once the government begins its borrowing programme.

The rise in yields was also due to the RBI governor's hawkish policy statement on April 1, which has led market observers to believe that the central bank won't cut key policy rates any time soon. In the first half of 2014-15, the government would borrow a gross R3.68 lakh crore, which translates to a borrowing of R16,000-17,000 crore a week.

According to experts, the increased supply of government paper is likely to result in a dip in bond prices which, in turn, would lead to a rise in bond yields of the 10-year government paper.

The yield on the benchmark 10-year 8.83% government bond closed at 8.961% on Wednesday, 158 basis points higher than Friday's close of 8.803%.

The fixed-income market was closed on Monday for Gudi Padwa and on Tuesday due to banks annual accounts closing.

The RBI's hawkish policy outlook has also pushed up bond yields.

According to Santosh Kamath, CIO fixed income, Franklin Templeton Investments India, although wholesale price index (WPI) inflation has edged towards RBIs comfort zone of 5-5.5%, headline and core CPI inflation still remain at elevated levels of near 8%.

In an election year, dole-outs might end up in fiscal pressures and increased consumption that could be inflationary in nature. These risks could keep policy rates at current elevated levels for an extended period of time. We, therefore, need to look at medium term trends rather than near term data points, he said. The RBI on Tuesday maintained its policy repo rate at 8% and kept the cash reserve ratio unchanged at 4%.

Meanwhile, the RBI in its note said foreign investors will not be allowed to purchase government bonds of residual maturity greater than one year.

This is likely to put some upward pressure on short-dated yields, said a recent report by JP Morgan. According to experts, the demand for T-Bills will now decline, which means the yields of T-Bills will rise. FIIs had invested close to R20,000 crore in the last quarter of FY14 in T-Bills.