Yields on benchmark bonds ended 2 basis points higher on Friday due to the higher cut-off set by the Reserve Bank of India (RBI) at the weekly bond auction and the chatter over policy normalisation among traders. Additionally, rising yields on US Treasury notes and crude oil prices in the international market led to sell-off in the market.
On Friday, the 10-year benchmark 6.10%-2031 bond yield ended at 6.2436%, against 6.2223% on the previous trading session. Market time was extended by 30 minutes as the weekly bond auction was announced late. With this rise, the yields on 10-year bonds have risen almost 11 basis points in one week.
“The 10-year G-Sec has risen towards 6.25% as traders remain cautious ahead of the RBI policy due on October 8. Bonds also sold off after a high cut-off was set at the weekly auction,” said Kunal Sodhani, AVP, Global Trading Center, Shinhan Bank India.
Dealers with state-owned banks said talks of policy normalisation by the RBI have weakened sentiments of investors, leading to sell-off.
Market participants expect the RBI to raise the reverse repo rate in the upcoming policy. This speculation gained momentum after the central bank set a higher cut-off of 3.99% on its 7-day variable rate reverse repo auction on Tuesday. The cut-off was 57 basis points higher than the previous auction where the RBI had set a cut-off of 3.42% with a weighted average rate of 3.39%.
At the weekly bond auction on Friday, the yields on the 10-year benchmark bond increased by 5 basis points from the last auction held on September 17, when the bond was part of it. The amount was fully subscribed and the central bank did not exercise any green shoe option. The RBI set 6.2324% cut-off yield on the 10-year bond, 6.9892% on 6.76%-2061 bond and 4.04% on the new GOI FRB 2028.
Meanwhile, the spike in US Treasury yields has worried investors across the globe. This is because of the Federal Reserve’s comment of faster-than-expected tapering and that the rate hike could be coming soon.
Adding to this, a tighter supply of crude oil led to a sharp rise in Brent crude prices in the international market, However, it cooled by $2 in two days after touching $80 a barrel. By the closing of market hours, Brent was trading at $78.01 a barrel for the November maturity.
Market participants expect the yield to move in a wide range ahead of the policy. Global factors and any uptick in crude oil prices over the weekend will put further pressure on the yields. “We expect the yield on benchmark bonds to move in the range of between 6.22% and 6.27% next week,” said a dealer with a state-owned bank.