Bond yields stay firm on lower June inflation print

July 14, 2021 12:50 AM

Yields on 10-year government securities and corporate bond ended mostly flat on Tuesday. The 10-year 6.10%-2031 gilt closed at 6.1026% and corporate bond having similar maturity traded between 6.90% and 6.95%. However, some liquid papers ended 3-4 basis points down.

On Friday, the US 10-year Treasury yields remained near 1.3% after strong retail sales data, but fears over rising inflation continue to affect the sentiment.On Friday, the US 10-year Treasury yields remained near 1.3% after strong retail sales data, but fears over rising inflation continue to affect the sentiment.

By Manish M. Suvarna 

Bond yields remained steady on Tuesday on better than expected retail inflation data for June, which eased marginally to 6.26% in June from 6.30% in May. The marginal fall in inflation eased the market’s fear of rate normalisation by the Reserve Bank of India.

Yields on 10-year government securities and corporate bond ended mostly flat on Tuesday. The 10-year 6.10%-2031 gilt closed at 6.1026% and corporate bond having similar maturity traded between 6.90% and 6.95%. However, some liquid papers ended 3-4 basis points down.

“Inflation has not gone up as much as the market was anticipating, but still remained on the higher side. Sentiments of traders improved that curb the fall of prices, after numbers were out as market was expecting bigger number and last month’s figures were also high,” said Mahendra Kumar Jajoo, chief investment officer, Fixed Income, Mirae Asset Investment Managers (India).

On Monday, the Consumer Price Inflation (CPI) fell marginally due to moderation in rural inflation, even though it remained over and above the central bank’s targeted range of 2-6% for the second consecutive month due to price pressure in segments like food and fuel.

The latest June data showed that the food inflation surged to 5.1%, as against 5.01% in May, while fuel Inflation rose to 12.68%. “Current inflationary pressures are still predominantly supply-driven. The government has already undertaken some supply augmenting measures, especially in case of pulses and edible oils, these are expected to ease price pressures in the coming months,” BofA Securities said in a report.

Yields on government securities are likely to trade in a thin range till the upcoming policy. Traders will wait for the central bank’s move on the inflation figures. Market participants expect the central bank to continue to focus on growth and may not be in hurry to tweak the policy rate or its accommodative stance.

In last month’s monetary policy statement, the central bank projected CPI inflation at 5.1% in FY22, with 5.2% in Q1, 5.4% in Q2, 4.7% in Q3, and 5.3% in Q4. Money market dealers are expecting that the central bank will announce a G-Sec Acquisition Programme (G-SAP 2.0) in this week, that will lead to marginal rise in prices of 5.63%-2026 and 6.64%-2035% gilts as these are expected to be included in the auction.

“We presume that the central bank will include 5.63%-2026 and 6.64%-2035% gilts in the auction,” a dealer with small finance bank said. The next purchase under G-SAP 2.0 will be conducted on July 22 for Rs 20,000 crore. The RBI had conducted an open market purchase of government securities of Rs 1 lakh crore under the GSAP 1.0 in the first quarter of the financial year 2021-22.

Last week, RBI had announced the cut-off for the new 10-year bond at 6.10%, which was higher than that of the current benchmark yields. It sold Rs 14,000 crore of new 10-year bond as part of Rs 26,000 crore during the auction on July 9. However, this was the first auction when there was no devolvement of bids to primary dealers.

The central bank is having a tussle with the government securities market to maintain yields below 6%, to help government for keeping borrowing cost low. The government had announced Rs 12.05 trillion government borrowing plan, of which nearly Rs 3.5 trillion has been raised. The borrowing was higher to boost growth during the pandemic.

To do this, the central bank has been buying bonds under G-SAP. Yields had eased after RBI Governor Shaktikanta Das in an interview said that the central bank would ensure the possible lowest borrowing cost of the borrowing.

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