10-yr bond yield rises to 7%; hopes of RBI rate cut di­min­ish

FIIs sold debt worth $600 mil­lion af­ter oil prices started spi­ralling

Financial Chronicle - - FRONT PAGE - FALAKNAAZ SYED

FOR the first time in a span of nearly 14 months, the 10-year bond yield rose to 7.05 per cent on Tues­day. A steady uptick in in­fla­tion and ris­ing global crude prices made in­vestors jit­tery and they fear the Re­serve Bank of In­dia (RBI) may shift its stance from neu­tral to tight­en­ing which led to hard­en­ing of yield.

The last time the yield was seen at this level was on Septem­ber 8, 2016. The bench­mark gov­ern­ment se­cu­rity had ended at 6.97 per cent on Mon­day. The yield could reach as high as 7.10 per cent, ac­cord­ing to IDFC Bank. Bond yields and prices move in op­po­site di­rec­tions.

Bond yield has been un­der pres­sure af­ter the Re­serve Bank of In­dia’s re­cent an­nounce­ment of debt sale of nearly Rs 10,000 crore through open mar­ket op­er­a­tions.

Ajay Man­glu­nia, ex­ec­u­tive vice-pres­i­dent and head fixed in­come ad­vi­sory at Edel­weiss Fi­nan­cial Ser­vices, said, “There is a con­stant uptick in in­fla­tion and oil prices which is mak­ing in­vestors jit­tery. They feel the rate eas­ing cy­cle is over. In­vestors fear there would be a huge sup­ply of gov­ern­ment bonds, as the gov­ern­ment may have to bor­row more. So, there is lack of in­vestor ap­petite for gov­ern­ment bonds, which has led to hard­en­ing of yields.”

“When­ever there is a rise in oil prices, for­eign in­vestors are able to get a value from their debt in­vest­ments in coun­tries that ex­port oil such as Malaysia and Indonesia. They exit their in­vest­ments from coun­tries that im­port oil such as In­dia. So, they like to own bonds of coun­tries which would be ben­e­fit­ing from a rise in oil prices… FIIs have sold gov­ern­ment bonds worth $600 mil­lion in the last 10 days,” said Anindya Banerjee, cur­rency an­a­lyst at Ko­tak Se­cu­ri­ties.

“We don’t ex­pect the yields to rise be­yond 7.17.15 per cent and could fall to 6.9 per cent in the next 10 days,” he added. In­vestors fear ris­ing oil prices would widen the gov­ern­ment’s bud­get deficit, forc­ing it to boost the size of debt sales just when state ad­min­is­tra­tions are bor­row­ing heav­ily and the cen­tral bank is sell­ing debt to suck out ex­cess liq­uid­ity from the sys­tem.

Sev­eral in­vestors, an­tic­i­pat­ing the bond yield rally to stall near 6.95-6.98 per cent, ac­cu­mu­lated long po­si­tions and were caught un­aware, forc­ing to cut losses as soon as the 10-year bond yield tested 7 per cent, said a trader with a pri­vate bank.

“The rate spread of 100 ba­sis points be­tween the 10-year bench­mark bond yield and In­dia’s key lend­ing rate of 6 per cent does not seem sus­tain­able,” said a se­nior bonds trader with a pri­vate bank, ex­pect­ing the yield to sta­bilise at 6.90-6.95 per cent amid ex­tended pause by the Re­serve Bank. “Higher than 7 per cent yield sig­nals a likely rate hike which is some­thing the mar­ket is not look­ing at.”

Bond in­vestors still ex­pect the Re­serve Bank to sig­nal its com­fort level on ris­ing bond yields ei­ther via a di­rect in­ter­ven­tion or other mech­a­nism.

“The in­ter­ven­tion by the RBI in gov­ern­ment bonds mar­ket de­pends what level the cen­tral bank is com­fort­able with for the 10-year bond yield to hover around. This can be war­ranted from the in­ter­est rate tra­jec­tory of the cen­tral bank or re­liant upon the next likely rate ac­tion,” the se­nior bond trader said. Wor­ries over wors­en­ing macroe­co­nomic fun­da­men­tals gath­ered mo­men­tum af­ter con­sumer price in­dex-based in­fla­tion quick­ened to seven-month high in Oc­to­ber and the trend was main­tained by the whole­sale price in­dex-based in­fla­tion too.

Con­sumer price in­dexbased in­fla­tion quick­ened to 3.58 per cent in Oc­to­ber af­ter ac­cel­er­at­ing by 3.28 per cent in Septem­ber. “For the 10-year bond yield, 7 per cent was a strong tech­ni­cal sup­port be­yond which no mar­ket par­tic­i­pant was ex­pect­ing the yield to breach. How­ever, the stop losses were trig­gered mainly af­ter the Oc­to­ber CPI rose, lim­it­ing the win­dow for RBI eas­ing cy­cle,” said an­other dealer with a pri­vate bank. “If the ru­pee breaches 66 vis-àvis the US dol­lar, over­seas in­vestors may cut mar­ket po­si­tion.”

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