Bonds gain, but rally may be short-lived

Written by fe Bureau | Mumbai | Updated: Dec 19 2013, 08:58am hrs
Government bond yields eased on Wednesday with the 10-year benchmark yield falling 7 bps after the RBI surprised everyone by keeping policy rates unchanged against wide expectations of a hike.

The benchmark 8.83%, 2023 bond settled at 8.79% on Wednesday, down from 8.86% on Tuesday. The yield had risen 7 bps over the last one week on expectations of a rate hike.

Bond dealers, however, said the current rally is likely to be shortlived because the RBI has kept the option of hiking rates open. Some market participants are already pricing in a rate hike in January. The benchmark 10-year yield could move in a 8.75-8.90% band, dealers said.

The rally to 8.79% is a relief rally. I don't think it will sustain beyond that. Other factors will take over from there. Also, there is uncertainty on what the next action from RBI will look like, said Ananth Narayan, co-head of wholesale banking and head of financial markets for South Asia region at Standard Chartered Bank.

The current rally could sustain but not for long. It depends on a lot of factors, including the Fed's decision on taper, said Ashish Parthasarthy, head of treasury at HDFC Bank. The US Federal Reserve is expected to pare its bond purchases under quantitative easing given the recent strong data from the economy. The taper will have implications for emerging market central banks.

Besides the Fed's taper and the upcoming inflation data, the RBI's statement that it may not stick to its scheduled policy dates to respond to inflation has increased uncertainty for the bond market. There can be a rate hike any day now even before the next policy if inflation turns ugly. It has become all the more difficult to judge when the rate hike will come, said a dealer with a public sector bank.

Also, the rally could be limited to the shorter end of the yield curve as movement in long-term bond yields would hinge on supply from the government's borrowing programme.