Government bond yields surged to a 21-month high with the 10-year benchmark 7.16%, 2023 bond yield rising to 8.88% on fears the Reserve Bank of India?s capital control measures announced on Wednesday would drive away foreign investors from the domestic debt markets.
?There is a negative sentiment in the market because of the dollar/rupee movement and the outflows from equity market. To top it, there was a bond auction as well adding to the pressure,? said NS Venkatesh, head of treasury at IDBI Bank.
The government had to pay 53 basis points more to borrow 10-year money from the domestic bond market at the auction on Friday compared with last week because of the surge in bond yields.
RBI set a cutoff yield of 8.74% on the benchmark 10-year 7.16%, 2023 bond at the scheduled auction on Friday, the highest cutoff for a 10-year since April 3, 2012. The central bank also sold three other bonds along side the 10-year bond at the auction.
?The currency obviously had a big impact given the funding cost has gone up significantly. Becuase the currency has still not stabilised, there is a fear on what will happen next, whether there are any other moves in the offing,? said Ashish Parthasarthy, head of treasury at HDFC bank.
On Wednesday, RBI brought down the overseas direct investment of companies to 100% of their networth from 400% earlier under the automatic route. The central bank also curbed the amount individuals can remit abroad to $75,000 from $200,000 under the liberalised remittance scheme and barred any real estate investment.
Surge in the sovereign bond yields rubbed off corporate bonds as well as yields jumped 20 bps here. Bond issuances came to a halt, dealers said.
?Companies will now wait as no one wants to borrow at such high yields,? said a merchant banker.
Bond traders including investors who bought bonds from the scheduled auction will face significant losses because of the rise in yields, dealers said. Most traders continued to sell to cut their losses after the auction resluts were released, dealers said.
?Everybody is lightening their positions as the market is thinking that other measures can happen as the currency has not stabilised yet,? said Venkatesh.
Foreign institutional investors are also said to have pulled out massively from bond markets. FIIs have pulled out $5.75 billion from domestic bonds since May 22 when the US Federal Reserve indicated it would start rolling back its quantitative easing.
The rise in US treasury yields to near 2-year highs of 2.78% also triggered selling by traders in the domestic market.