Despite the Reserve Bank of India (RBI) indicating that there would be no further hikes at its December 16 review meeting, the yield on the most-traded benchmark bond rose the most in three weeks to close at 8.845%, the highest since August 26, 2008, just before investment bank Lehman Brothers collapsed to trigger a global financial meltdown. The yield on the benchmark treasury paper has jumped more than 50 basis points since the government announced on September 29, 2011, that it would need to borrow an additional R52,900 crore in 2011-12.
While there were takers for the gilts, the third auction in the second half of the year saw high cut-off yields. Primary dealers had to pick up R150 crore worth of unsold debt for a third consecutive time this month, though the amount devolved was was miniscule compared to that in previous two auctions, which had seen devolvements of R900 crore and R4,000 crore respectively. Yields on papers due in 2017, 2022, 2027 and 2040 that were auctioned come in at 8.92%, 8.95%, 8.98% and 8.98% respectively. The secondary market yields on the 2017 and 2022 government paper are currently quoting at 8.86% and 8.92%. Said NS Venkatesh, head, treasury, IDBI Bank, Given the way market has behaved in the last two sessions, it looks like the policy announcement hasnt been fully digested.
Venkatesh feels it's unlikely that the yield on 10-year paper would breach 9% levels as the monetary policy clearly states that there won't be further rate action in December.
Vivek Mhatre, head-treasury, Union Bank of India, said, The hardening of yields was on the back of heavy supply coming into the market and rise in global commodity prices, which could continue to exert pressure on inflation, and, hence, rates could stay elevated.