The yield on benchmark bonds surged more than 9 basis points for the week ended January 7 following a sharp rise in US Treasury yields, hawkish minutes by the US Federal Open Market Committee and a sharp rise in global crude oil prices. Additionally, there was disappointment among traders after states increased their borrowing through bonds in the January-March quarter and the absence of announcement of a new benchmark bond by the Reserve Bank of India (RBI).
The yield on the benchmark 6.10%-2031 bond , which was trading at 6.4537% last week, breached the psychological mark of 6.50% and traded above 6.54% by the middle of this week. It ended at 6.5423% on Friday.
“Currently, Indian bond yields are more influenced by external factors like the US Treasury yields and crude oil prices which are moving higher. As things settle down on the global front, we may see markets switching their focus to domestic inflation and fiscal deficit. At the current level of yields, much of the negative seems already priced in,” Pankaj Pathak, fund manager, fixed income at Quantum Asset Management, said.
The yield rose through the week following the sharp rise in 10-year benchmark US Treasury notes after FOMC minutes signalled earlier-than-expected tightening of monetary support and an expected rate hike in 2022. The 10-year benchmark US Treasury notes have surged nearly 20 basis points since last week and ended at 1.73% on Thursday. Rising yields on US securities narrow the interest rate differential with emerging markets debt yields, leading to the latter becoming less attractive to foreign investors.
Prices of Brent crude oil have risen after the unrest in Kazakhstan and the deteriorating political situation in Libya which affected the supply. By the end of Indian market hours, Brent crude prices were trading at $82.78 a barrel, up 0.96%.
Adding to this, there was also uncertainty among investors after the market borrowing of states via bonds in January-March increased more than the expected amount. The RBI, last week, announced a higher market borrowing of Rs 3.09 lakh crore for states for the quarter January-March. “The yield should continue to see upward pressure as the markets worry about the supply, including SDL, as we enter the Budget session,” Sandeep Yadav, head – fixed income, DSP Investment Managers, said.
Market participants expect the RBI to announce a new benchmark next week as the current 10-year benchmark bond has reached an outstanding amount of Rs 1.5 lakh crore. Dealers expect each auction will put an added strain on the yields due to cancellation and devolvement on primary dealers.
“The cancellation of the auction last week does show RBI’s discomfort on the sudden rise in yields. Thus, it is quite likely that the RBI will announce a new 10-year benchmark to show better headline numbers on benchmark yield,” Yadav said.