The yield on government bonds continued to rise, with the 10-year yield jumping to a five-month high on Monday, as traders continued to cut positions on worries over fiscal slippage and a weak appetite to meet upcoming supply. The benchmark yield ended at 6.5967%, the highest level since March 27, after closing at 6.5510% on Friday. The yield had jumped 15 basis points last week and rose 27 bps since the policy.
The yield has been rising since the last policy as the market has ruled out further rate cuts for the year. Though the rating upgrade brought a slight relief and pushed down yields by around 10 bps on August 14, it reversed on the next day as bonds reacted to the announcement of GST rationalisation.
Weak demand pressures bond market
The possibility of no further reduction in rate and fiscal worries over GST slab changes worsened the demand-supply dynamics of the bond market owing to a lack of buyers on the longer-end. Insurance companies and pension funds are absent from the market, adding pressure on duration bonds, said dealers.
“The demand-supply and fiscal situations are currently playing out in the market. It has not seen a demand-supply issue at least in the last 3-4 years on account of FPI inflows and RBI’s OMO auctions. However, currently, the FPI demand is muted and the RBI is not able to conduct bond purchases, given the CRR (cash reserve ratio) cut taking effect from September. We await some sort of communication from the RBI to know if it is comfortable with the current levels,” said the head of fixed income at a mutual fund.
Yields may test 6.75%, GDP data key
Rajeev Pawar, head of treasury, Ujiivan Small Finance Bank, said: “Considering the market sentiment right now, yields may touch 6.75%. Going ahead, the market will keenly watch the GDP print, which will give some idea on growth. If it turns out significantly lower, the market will see a rally and will start pricing in a rate cut.”