Bond Yields Fall Sharply As Banks Cut Lending Rates
Bond Yield Slide For Fourth Straight Session On Monday
Bond markets started 2017 on a strong note with benchmark yields sliding 11 basis points after banks decided to cut lending rates steeply over the weekend. This is fourth consecutive session that yields have fallen.
For the day, the 10-year bond yield ended at 6.40 percent as compared to 6.51 percent on Friday. The 10-year yield has fallen 20 basis points over the last four trading sessions.
Bond market participants cited a cut in bank lending rates as one of the reasons behind the steep fall in yields. In addition, with economic data starting to reflect weakness, hopes of an interest rate cut are also on the rise once again. One such data point was the Nikkei Purchasing Managers’ Index, released on Monday, which reflected a contraction in manufacturing activity in December.
Separately, on Sunday, State Bank of India cut its lending rates by 90 basis points. Others like ICICI Bank have also cut rates sharply.
MCLR (marginal cost of funds lending rate) cut by banks comforted the bond markets. However, that is not the only factor. Besides, a softening of US treasury yields from 2.50 percent to 2.45 percent level, stabilizing oil prices and hopes of a rate cut by Reserve Bank of India have also led to positive sentiment for bond buyers.Overall, we expect bond yields to trade in the range of 6.40-6.60 percent with a downward bias till budget, which will hold the key for future direction of the yields.K Harihar, Head of Treasury, FirstRand Bank
The move in bond yields on Monday was the biggest intraday move seen since December 15, when the yields jumped to 6.52 percent from 6.40 percent. Yields had been rising after the RBI kept interest rates steady in December. Minutes of the monetary policy committee (MPC) meet had shown that RBI governor Urjit Patel was focused on bringing inflation down to 4 percent over the medium term.
Yields which had inched higher by 40 basis post RBI monetary policy scenario have recouped 20 basis point, 50 percent of its losses in the last four trading sessions. Announcement of a cut in lending rates by banks amidst excessive liquidity mainly aided bond recovery in today’s trade. Besides, abatement of the sell-off seen in developed markets, especially, 10 year US treasury, also aided the retraction in the bond prices. Overall, positive bias on domestic interest rates and the easing inflation scenario would keep yields in the range of 6.25- 6.50 percent in the run up to the Budget.Manish Wadhwan, Head of Interest Rates, HSBC India
