Volumes shot up on Tuesday to the tune of Rs 24,410 crore for the ten-year benchmark paper. On an average, the volume for the benchmark paper remains at about Rs 15,000 crore, say experts
Bonds sold off sharply on Tuesday with the ten-year benchmark yield closing at a two-week high of 7.38%. This is the biggest single-day surge in yields since the first week of February.
Market participants observed that market borrowings by state governments in the first quarter of the current fiscal year has exceeded the previous year’s quantum by a significant amount.
According to the indicative borrowing calendar put out by the Reserve Bank of India (RBI) last week, SDL borrowings in the first quarter amounts in the range of `1.15-1.28 lakh crore. This is almost double the amount seen in the first quarter of fiscal 2018 when the amount stood in the range of `67,850-77,700 crore.
Suyash Choudhary, head-fixed income at IDFC Asset Management, points out that Tuesday’s sell-off in the bond market was reflective of the front-loading of SDL borrowing.
“Although a slightly more dovish RBI policy played its part, the most significant reason why the yields softened in the last two weeks was the comfort that lower supply of G-secs would be hitting the market in the first half of the fiscal. However, this reduction has been negated by a hike in the quantum to be borrowed via SDLs in the first quarter of FY 2019 itself. The market price action is a natural adjustment to this new reality,” he said.
Volumes shot up on Tuesday to the tune of `24,410 crore for the ten-year benchmark paper. On an average, the volume for the benchmark paper remains at about `15,000 crore, according to market experts.
Ajay Manglunia, EVP, Edelweiss Financial Services argues that SDLs are naturally yielding higher than G-secs and when such a heavy supply is hitting the market, it would adjust for a more lucrative paper.
“If you look at the borrowing calendar, the first quarter quantum is almost twice of what we saw in the same quarter last fiscal. We also have to consider the supply-demand dynamics as there is a lack of active participation by public sector banks in the bond markets at the current juncture. Moreover, the crude has also inched up. These factors are weighing heavily on the bond market.”
Bonds had rallied in late March after the government decided to reduce its market borrowing in the first half of the fiscal year and also trimmed the duration of the papers to be auctioned in this period. Yields fell down further after the RBI allowed banks to spread their mark-to-market (MTM) provisioning across four quarters.
However, public sector banks (PSBs), which are the biggest buyers of G-secs, have refrained from any major buying despite the string of postive news flow. Since the beginning of calendar year 2018, PSBs have sold over `45,000 crore of central government securities on a net basis. In April so far, PSBs continue to remain net sellers of G-secs at Rs 8,800 crore.
If PSBs continue to remain on the sidelines, market experts believe that a replacement demand has to be created to absorb the supply failing which the yields might continue to surge. “We will witness the second auction of the current fiscal year this week and the market is already facing uncertainties,” said a treasurer.