The yield on the old benchmark government bonds rose five basis points to touch 8% on Tuesday, the first time since it was introduced.
The yield on the 7.59% 2026 bond, the new ten-year benchmark, closed five basis points up at the highest ever level of 7.82% ever since it was introduced in January this year.
Bond market players attributed the rise to more than Rs 21,000 crore of state development loans (SDLs) being auctioned.
Badrish Kulhalli, fund manager-fixed income, HDFC Standard Life Insurance pointed out the primary reason behind the rise in G-Sec yields was the State Development Loans (SDLs) auction which saw the cut-off for some states coming in at levels as high as 8.88%. “States have been borrowing heavily in the fourth quarter and this supply has contributed to the rise in yields,” Kulhalli said.
The yield on the benchmark was last at 8% in early December 2014. Post that the yields have remained below the 8% mark.
The Reserve Bank of India (RBI) has cut the repo rate by 125 basis points in the calendar year 2015.
Market participants attribute this rise in yields to the new supply of SDLs hitting the market on Tuesday with highest cut-off yield trending as high as 8.88%.
SDLs of twenty one states were auctioned on Tuesday for a cumulative amount worth Rs 21,445 crore. The highest cut-off yield was offered by the state of West Bengal at 8.88% for its 10-year SDL while the lowest cut-off for 10-year SDLs stood at 8.63% of four states.
Experts say the bond market will be keenly watching the union budget for clarifications on how the fiscal deficit projection pans out and the timing of UDAY bonds.
“The market is apprehensive of a slippage in the government’s projected fiscal deficit path and the likely additional borrowing that will entail. This will increase the supply of G-Secs in the system. The markets are also factoring in the possibility of additional supply of UDAY bonds which will exacerbate the high supply of G-secs and push the SDL yields higher,” Kulhalli indicated.
Foreign portfolio investors (FPIs) have sold $310.92 million of Indian debt in the last two sessions, according to Bloomberg data. On a y-t-d basis, FPIs remain net sellers of Indian debt at $145.30 million.