The government bond yield curve has flattened out with short-term yields rising and could continue to remain so in coming months now that inflation pressures have resurfaced.
The spread between different tenures at the shorter end has narrowed sharply over the last few months. The spread between the five-year bond and the benchmark 10-year 8.83%, 2023 bond to a mere 4 basis points from 20 bps in January.
?I think the curve will likely remain elevated and the 10-year bond could move in a 8.90-9.10% band because, clearly, inflation pressures are still there,? said Dwijendra Srivastava, head of fixed income at Sundaram Mutual Fund.
The short-term bond yields may continue to remain elevated given that inflation pressures have resurfaced, dimming the odds of a more dovish policy stance from the Reserve Bank of India.
?At this point, we can?t see RBI easing rates any time soon, neither in June nor in the policy after that,? said Samiran Chakraborty, chief economist at Standard Chartered Bank.
Wholesale price index based inflation rose to 5.7% in March to hit a three-month high with most sub-groups contributing to price pressures. Consumer price inflation, tracked by the RBI for policy purposes, rose to 8.31% in March from 8.1% in February.
RBI governor Raghuram Rajan had left policy rates unchanged in April and said that further rate hikes may not be warranted if inflation sticks to the glide path expected by the RBI and eases to 8% over the next one year.
Despite WPI inflation rising and the expected huge supply in the coming weeks, the 10-year bond yield ended flat at 8.95% after hitting an intraday high of 9.03% on Tuesday. ?A level above 9% is very attractive to buy and that is why we have seen this fall intraday,? said a bond trader at a private bank.
Market participants also said bond yields would see additional upward pressure as supply continues to hit the market through auctions every week. The government has indicated it will borrow R3.6 lakh crore from the bond market during April-September. Out of this, 82%, or nearly R3 lakh crore, of bonds issued will be with a tenure of above 10 years.