Bonds sold off sharply on Thursday, sending the yield on the benchmark soaring to 7.396%, an over-18-month high, after the government announced on Wednesday it was borrowing an additional Rs 50,000 crore by way of dated securities. Thursday’s rise was the biggest single-day one since February. In intra-day trades, the yield climbed to a high of 7.399%. While the surge in yields has been attributed to the bigger-than-expected additional borrowings, market participants believe the yield should stabilise at around these levels once the shock wears off. The additional market borrowing via long-term securities is almost twice the amount pencilled in by the markets. Economists say there could be some shortfall in estimated goods and services tax collections; inflows in November came in at `80,808 crore compared with close to Rs 95,000 crore in July when the GST was rolled out. The government is set to sell Rs 15,000 crore worth of dated securities on Friday and market experts believe the weak sentiment could impact the auction. “It could be difficult for the government to sell the entire amount all given how negative the sentiment is,” said Lakshmi Iyer, chief investment officer (debt), Kotak AMC.
Iyer said several public sector ones may have booked profits in their bond portfolio though some shorts may also have been triggered. “The sell-off was intense in the three- to five-year tenor too, which are held largely by banks,” Iyer added. Badrish Kulhalli, head, fixed income, HDFC Standard Life Insurance, observed that should states need to borrow less as a consequence of the government’s objective to run down the T-bill portfolio, the supply of paper would reduce. “If states borrow less that could offset the additional borrowing by the central government,” he said. Economists believe the fiscal deficit could slip by about 20-25 basis points as a consequence of the higher-than-expected borrowings. They rule out a rate cut by the Reserve Bank of India in the near term since the central bank has already been red-flagging the elevated deficits of the state governments.