Last week, the 10-year benchmark paper crossed 8% mark to touch 8.02%, the highest level in 17 months. The rise wasn?t totally unexpected since the money market has been anxious ahead of the government borrowing programme announcement, scheduled to be announced later this month.
With the net borrowing for 2010-11 pegged at Rs 3.45 lakh crore, the government is expected to mop up Rs 14,000 crore a week in the first six months of 2010-11. As such, dealers expect yields to harden further in the short term. The bond yield has moved up by 14 basis points, since the Budget was presented on February 26.
Pressure from borrowings apart, there is some expectation of a hike in interest rates as inflation continues to remain high and economic growth retains momentum. Factory output increased 16.7% year-on-year in January this year. RK Gurumurthy, head of trading, financial markets at ING Vysya Bank says the Reserve Bank of India?s (RBI) action on rates will be independent of where the bond yields are. ?It will take into account the inflation expectations and the rate at which the economy grows. Therefore, a hike in key rates will not be surprising and in order,? he points out.
J Moses Harding, head of global markets group at Indusind Bank expects the ten-year benchmark 6.35% bond maturing in 2020, to trade in the range of 7.90-8.15%. ?The market is awaiting the borrowing calendar. It?s also waiting for RBI?s strategies to bridge market demand for bonds of shorter maturities and also to see how much supply comes in at the medium and longer end, ?he says. Gurumurthy believes advance tax outflows could suck the liquidity from the system and that the new borrowing calendar for 2010-2011 is expected to be frontloaded. ?I would expect a 7.90-8.10 range for the 10-year paper? he says.
Harding says while the borrowing calendar is a major issue for the market, ahead of inflation and rate hike fears, the RBI needs to restrict the supply to floating rate bonds and fixed rate shorter tenor bonds between 1-3 years in order to prevent the yield breaching 8.15-8.25%. There are no other factors to push bond yields higher with limited risk of either liquidity or rate push factors coming into play, he adds. Finance minister Pranab Mukherjee has announced a borrowing programme of Rs 4.57 lakh crore for 2010-11 as against Rs 4.51 lakh crore for 2009-10.