Traders see yields at 7.5% on lower borrowing target

By: | Published: February 24, 2015 12:30 AM

Government bond yields, having eased up to 18 basis points since January, are expected...

Government bond yields, having eased up to 18 basis points since January, are expected to move further south in the coming weeks with treasury desks in most banks pricing in a lower net borrowing for 2015-16 from the Union Budget.

The Union Budget is likely to peg the gross borrowing at Rs 6 lakh crore but the net borrowing could be at Rs 4.5 lakh crore, lower than Rs 4.6 lakh crore in 2014-15, said bond traders.

Ananth Narayan G, regional head of financial markets for South East Asia at Standard Chartered Bank, expects even the gross borrowing to be lower at Rs 5.75 lakh crore. “We expect switches through which short-term bonds will be bought back and long-term issued. We expect the government to target a fiscal deficit of 3.6% for the next year,” he said.

Bid-Maturity

The government had pegged gross market borrowing for current financial year at Rs 6 lakh crore and net borrowing at Rs 4.61 lakh crore.
Some traders, however, believe that given high redemptions of Rs 1.16 lakh crore, the gross market borrowing could be higher. “I expect the gross borrowing to be higher than the current year’s Rs 6 lakh crore because we have a large redemption of bonds,” said Ashish Parthasarthy, head of treasury at HDFC Bank.

The benchmark 10-year 8.40%, 2024 bond yield settled at 7.70% on Monday and is down 20 bps so far in 2015.

A lower market borrowing would mean that banks would have more room to disburse loans to private companies. Further, a lower fiscal deficit would give RBI more room to cut rates. “The RBI governor has said he would be watching the Budget carefully for implications on monetary policy. So, in that sense this Budget is important as it would give an idea of more rate cuts,” said Venkatesh.

Bond traders expect yields to hit 7.50% by March end. “I think the market is confident the finance minister will deliver on all aspects of fiscal consolidation. So the 10-year yield could be around 7.50% in March,” said NS Venkatesh, head of treasury at IDBI Bank.

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