Bond Yields Surge To 5-Month Highs
10-year bond yield surged to 6.95% intraday, ahead of the release of the monetary policy committee minutes.
Indian bond yields rose for the third consecutive session on Wednesday, coming within striking distance of the 7 percent market.
The benchmark 10-year bond yield rose to a 5-month high of 6.95 percent intraday, as traders remained nervous ahead of the release of the minutes of the monetary policy committee (MPC). On February 8, the committee surprised markets by keeping rates unchanged and changing the policy stance to neutral from accommodative. Since then, the 10-year yield has risen by 50 basis points.
The minutes, released after market close, however, held no negative surprises. In contrast, RBI governor Urjit Patel reiterated that the neutral stance allows the RBI to adjust interest rates in either direction. He added that the move towards 4 percent inflation would be a “calibrated” one.
For the day, the 10-year yield ended at 6.93 percent, up from its previous close of 6.90 percent. It touched a high and low of 6.95 percent and 6.91 percent respectively.
“The market is still trying to find a level it is comfortable with. While central government issuances for the year have been concluded, issuance of SDLs (State Development Loans) and UDAY Bonds remain high,” said Soumyajit Niyogi, associate director at India Ratings & Research. Niyogi said that yields may move up to 7 percent but could find stability at levels just below that mark.
Notably, the bond markets have now given up all the gains seen following the government’s demonetisation decision. The 10-year yield, which was trading at around 6.80 percent before the note ban decision, fell to 6.18 percent post the announcement as banks parked excess liquidity in government bonds. This, however, changed after the RBI started sucking out liquidity through reverse repo operations and issue of cash management bills.
Government bond purchases from banks have been subdued in recent weeks, said Niyogi while adding that this could reverse once the liquidity situation stabilizes after cash withdrawal limits are withdraw on March 13.
Bond yields are expected to hover in the range of 6.85-7.00 percent. A confluence of factors such as increasing conviction that there is limited room for rate cuts; a change in RBI’s stance; reduced market liquidity surplus to Rs 5,00,000 crore; higher commodity prices; sticky inflation data; and the possibility of rate hikes from the US Federal Reserve have pressurized bonds. However, return of foreign institutional investors ( FIIs) in February may cap any further uptick in yields.K Harihar, Head of Treasury, First Rand Bank
Foreign Institutional Investors turned net buyers of domestic debt in February. So far this month, they have bought Rs 6651 crore of Indian government bonds after four straight months of selling. The monthly purchase amount is the highest since September 2016, when FIIs had bought Rs 9,789 crore in the debt market.