Ten-year benchmark government bond was the most profitable and liquid security among sovereign bonds in the market and every investor who picked this bond at its maiden auction was guaranteed a gain. But not any more.
Perhaps for the third time in a decade, a newly issued 10-year benchmark government bond is what traders term “out of the money” now. In other words, everyone who fought to get hold of this paper on the May 22 maiden auction, is running a mark-to-market loss currently.
“Most bonds are out of the money right now as yields have risen across the curve. The volatility in global bond markets and with inflation data due, people do not want to make big bets,” said Jayesh Mehta, head of treasury at Bank of America-Merrill Lynch.
The 7.72%, 2025 bond settled at a yield of 7.88% on Thursday, 16 basis points above the cut-off yield at which it was issued on May 22. If an investor had bought R100 worth of the bond, he finished Thursday with an mark-to-market loss of R1.09. The bond has been auctioned twice and the floating stock for trading in the market is at R16,000 crore now.
“The market will watch for comments from the Fed because a large part of the pressure is from the global sell-off in bonds,” said NS Venkatesh, the executive director at IDBI Bank.
Bond traders said yields across the curve have risen, owing to the scare on monsoon deficiency and a global bond sell-off that continues, and the 10-year benchmark is no exception. “Long-term bonds have fallen far more than the 10-year benchmark. Portfolios are getting hit across the curve,” said a senior bond trader at a private bank.
Bond yields from the US to Europe have risen to multi-month highs as investors dumped fixed income amid rising oil prices and the imminent rate hike by the Federal Reserve in 2015. Domestic bond yields have mirrored the move in global yields over the last one week.