Yields on the 10-year benchmark government bond soared to 8.75% on Monday, hitting a new three-year high with bond markets nervous about the R52,800-crore increase in the government?s borrowings for 2011-12.
Rising for a ninth consecutive day, the yield on the benchmark 7.8% 2021 bond shot up 18 basis points to 8.75% from 8.57% on Wednesday. That?s the highest level since August 2008, the start of the global financial crisis.
Last Friday, an auction of bonds for R15,000 crore conducted by the Reserve Bank of India (RBI) did not find enough takers.
Around R900-crore worth of long-term bonds, maturing in 2027 and 2040, devolved. Bonds across four different maturities, ranging between 2017 and 2040, were auctioned by the central bank and the cut-off yields on 2022 paper came in at 8.70% against the government rate of 8.08%.
The yields on the benchmark treasury paper have jumped over 40 basis points in just five trading sessions after the government announced on September 29 that it would need to borrow an additional amount of around R52,900 crore, taking the total net borrowings for 2011-12 to R3.96 lakh crore. The government will borrow R15,000 crore less through treasury bills.
However, most bankers don?t see yields hardening any further.
Anjan Barua, deputy managing director and group executive, global markets, State Bank of India, said: ?This is toppish and I don’t see the yields going up further, especially since the liquidity situation appears to be comfortable. Barua believes this could be a good time to invest in a risk-free and liquid instrument like the government securities.
?One can always borrow at 8.25% through the Reserve Bank?s Repo facility by pledging this paper, ? he added.
BoA Merrill Lynch believes that the yield would persist in its trading range of 8-8.5%. Moreover, it believes the central bank would increase policy rates by 25 basis points at its meeting later this month unless the US is seen to double dip.
TS Srinivasan, GM (treasury), Indian Overseas Bank, however, expects yield on the 10-year to touch 8.80% levels by October-end. ?The sentiment is bearish because there is a worry that the government will need more money. State-owned banks are already holding about 29% SLR against the required 24% and this is limiting our ability to bid aggressively, ? he observed.
According to Srinivasan, open market operations (OMO) by RBI or a reduction in unplanned expenditure by the government can help soothe the bond market.
Dealers believe that any more devolvement at auctions would further dampen the sentiment since primary dealers might have to incur losses.