Benchmark yields rise 5 bps in two days on supply pressure

Yields on benchmark bonds have risen by 5 basis points over the last two days due to supply pressure on account of weekly bond auction amid the possibility of a hike in the reverse repo rate in the December policy. The benchmark 6.10%-2031 bond yield ended at 6.3880% on Friday, against 6.3670% on Thursday.

The market time was extended twice by 30 minutes on Friday due to the late announcement of the weekly bond auction.

The central bank accepted all the bids worth Rs 24,000 crore on three bonds offered for sale. The Reserve Bank of India offered GOI FRB 2028, 6.10%-2031, and 6.76%-2061 for sale in the weekly auction. The cut-off was in line with market expectations.

The market is expecting a hike in the reverse repo rate in the December policy after the central bank hiked the amount of reverse repo auctions, which led to a spike in fixed-income rates such as OIS rates and other short-term rates. This was supported by a higher cut-off rate set by the central bank on reverse repo auctions.

“Reducing the overnight liquidity surplus is also impacting the bond yield,” said Pankaj Pathak, fund manager – fixed income at Quantum Asset Management.

Traders are concerned that the central bank is fine-tuning liquidity by conducting VRRR auctions. Market players expect the central bank to hike the reverse repo rate by 15 basis points in the December policy. Currently, liquidity in the banking system is estimated to be in a surplus of around Rs 7 lakh crore.

Meanwhile, yields on US Treasury notes rose on Thursday which impacted the markets. Yields on US Treasuries rose nearly 5 basis points on Thursday despite a disappointing update on the third quarter GDP, which increased 2% compared to a year-ago period.

Apart from this, crude oil prices are still trading above $80 a barrel on supply concerns, which triggered inflation concerns among traders.

Currently, the Brent crude oil prices are at two-week low as concerns about US supply growth decreased with Iran supply coming into focus. By the closing of market hours, Brent crude prices were trading at $84.55 a barrel for December maturity.