MUMBAI: The benchmark bond yields pierced the psychologically important 8% mark for the first time since December 2014 sparking fears of a faster rise in borrowing cost after the Reserve Bank of Indias first rate increase in more than four years.
The benchmark bond yield surged to as much as 8.03% on Friday pulling prices down. It erased early losses to close at 7.95%. The gauge last crossed 8% on December 17 four years ago.
“Debt market opened weaker amid overnight turmoil in emerging markets and high crude oil prices,” said Naveen Singh, head of government securities trading at ICICI Securities Primary Dealership. “But the surprise buying around the RBIs weekly auction caught the market off-guard. Bond yields erased initial losses to close stronger.”
In the RBIs weekly bond auction, only a few large state-owned banks seem to have placed aggressive bids.
For example, 10-year bonds worth Rs 4,000 crore was up for sale where the central bank received 230 bids, but just three bidders were allotted because of lower yields. Similarly, a single bidder obtained the entire 27-year series for Rs 3,000 crore where RBI had received 84 bids.
The best yields at which the new10-year bonds were auctioned was at 7.95%, which dragged the benchmark gauge down later in the trading session.
Globally, emerging markets have been in turmoil for a few months now especially after signals from the US that the Federal Reserve may step up its pace of balance sheet shrinkage and rate hikes after faster-than expected economic growth.
Turkey tightened monetary policy Thursday for the third time in less than two months while the central bank of Brazil sold extra foreign-exchange swap contracts for the second time this week, a move billed as a shield against sharp decline in the local currency.
“There is little appetite with domestic banks to buy incremental G-secs,” said Pradeep Khanna, head of trading, Global markets, HSBC India. We are experiencing lower volumes in the secondary market.”
“You need tremendous overriding domestic factors to push Indian yields down when globally interest rates are heading up. We do not seem to have that,” he said.
Yields may rise another 10-15 basis points in the next few days, pushing up the governments borrowing cost, dealers said. Bond yields and prices move in opposite direction.
“The pressure on long maturity central government bonds is likely to continue as state government bond dynamics will take new turn given the transparent mark-to-market framework,” said Ashish Vaidya, executive director and head of trading at DBS Bank India.
The RBI in its bi-monthly monetary policy has changed norms for valuing state bonds. The latest norms on treatment of mark-to-market treasury losses came as a welcome surprise to Indian lenders but it is expected to push up the bond yields with some banks facing prospects of substantial value erosion on their investments in state-government bonds.
Yields on state bonds have risen five basis points after the RBI policy.
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