Fiscal relief: Bonds fall on lower crude, unchanged H2 borrowing

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Published: October 2, 2019 1:50:00 AM

According to Vijay Sharma, senior executive vice-president, PNB Gilts, the yield on the new ten-year bonds that have been announced is likely to be around 6.50% taking into account a 25 bps cut in the upcoming monetary policy.

The issuance of the new 10-year paper could have some short-term impact on the trading range. (The yield is) expected to be 10-15 bps lower than current 10-year yield levels,” he said.

With the borrowing calendar for the second half of the current fiscal coming in on the expected lines and crude prices having dipped below the $60 level, bond markets reacted positively on Tuesday with the rally mostly reflecting in papers other than the benchmark bonds. Although the benchmark yield closed only 4 bps down at 6.66%, the positive reaction was visible in other papers like the 7.27% government security (GS) 2026 notes and 7.57% GS 2033 notes, which ended the session down by 7 and 13 bps, respectively.

Out of the government’s gross borrowing of Rs 7.10 lakh crore for FY20, it has already borrowed Rs 4.42 lakh crore in the H1FY20 and will be borrowing the remaining Rs 2.68 lakh crore in 17 weekly auctions in the second half of the fiscal. This was on expected lines, bond dealers said.

The announcement of the issue of new ten-year benchmark bonds, as well as the the approval of stake sale in five PSUs, were also taken positively by the bond market. According to Vijay Sharma, senior executive vice-president, PNB Gilts, the yield on the new ten-year bonds that have been announced is likely to be around 6.50% taking into account a 25 bps cut in the upcoming monetary policy.

“Along with the borrowing calendar that was announced on Monday, certain other developments like fall in crude prices, degrowth in the core sector (which increases the expectation of a higher rate cut in the upcoming policy) and the announcement on the disinvestment side also led to a fall in yields,” he explained.

The issue of the new benchmark bonds always attracts a lot of interest as all market participants want to take positions in the paper. The RBI will be conducting auctions on Friday for the sale of government securities of different tenors to the tune of Rs 16,000 crore. According to the RBI’s release, it intends to sell Rs 7,000 crore worth of the new benchmark bonds on Friday.

Abheek Barua, chief economist at HDFC Bank, expects a 25 bps cut in the October monetary policy. “This could help rein in some of the pressure on yields. The issuance of the new 10-year paper could have some short-term impact on the trading range. (The yield is) expected to be 10-15 bps lower than current 10-year yield levels,” he said.

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