Bond yields rise to 8.44%, highest since Aug, as govt ups borrowings

Written by fe Bureau | Mumbai | Updated: Sep 30 2011, 05:37am hrs
The yield on the benchmark 10-year government bond rose a sharp 10 basis points on Thursday as the government decided it would need to borrow an additional R52,800 crore this year. Bonds sold off with the markets surprised by news of addition supply of government paper. The yield on the most-traded benchmark bond rose 10 basis points to 8.44%, the highest since August 3, 2011. Most treasurers had pencilled in extra borrowings of between R25,000 crore and R30,000 crore.

ADM Chavli, treasury head, Bank of Baroda, said, The increase in borrowing is double what was expected and hence, the markets reacted in a knee-jerk fashion. J Moses Harding, head of global markets, IndusInd Bank, added that the government had done a good thing by cancelling treasury bill auctions worth R15,000 crore saying it would take some pressure off the market. The Centre will raise R2.2 lakh crore in the second half of 2011-12 higher than R1.6 lakh crore planned earlier. The government has already raised R2.5 lakh crore in the first six months of the year.

Meanwhile, the overnight index swap (OIS) market also reacted swiftly to the rate hike. The yields on the longer end 5-year and 10-year OIS went up by 21 and 18 basis points respectively to 7.14% and 7.15% respectively. The yields on the 3-month and 6-month OIS shot up by 5 basis points each to 8.35% and 8.21% respectively.

Market participants, however, feel the huge spike in yields on Thursday was also on account of stop losses getting triggered as most traders were long bonds.The current levels may not sustain because there was good buying at 8.35% levels and stop losses may have got triggered, observed Harding. Others too believe that absorbing the extra supply of paper in the second half wont be too much of a challenge since credit growth so far has been rather muted. In the Union Budget 2011-12, the Centre had pegged the gross market borrowings at R4.17 lakh crore, to help bridge a fiscal deficit that is forecast to be at 4.6% of the GDP. That number now stands revised to R4.7 lakh crore.