Sovereign bond yields shoot up

„Govt borrowing plan stupefies market

Benchmark 10-year bond yields surged on Monday following the government's decision to sharply increase market borrowing amidst a major hit to the economy and public finances from the coronavirus pandemic.

The Centre plans to borrow Rs 12 lakh crore ($160 billion) in the fiscal year to March 2021, up from the previously budgeted Rs 7.8 lakh crore, to cushion the blow from the pandemic, it said on Friday.

The government did not specify whether the additional borrowing would be used to cover the revenue shortfall from the lockdown or used to fund additional expenditures.

However, analysts broadly believe the additional borrowing would push the fiscal deficit for the current year up to at least 5.5 per cent of GDP, 200 basis points above the current projection.

The benchmark 10-year bond yield rose as much as 27 basis points to 6.24 per cent in opening deals and closed at 6.17 per cent.

The new 10-year bond issued last week also climbed as much as 22 bps to 5.94 per cent.

Traders said yields were likely to settle around these levels in the nearterm but a lack of any clear central bank guidance on whether it plans to support the market through additional bond purchases may push

yields up further.

"While we do not believe that private placements are ideal, depending on the market conditions, we think that the RBI will continue to provide some support through open market operations, as it has in recent weeks, without necessarily announcing an OMO (open market operation) schedule," Rahul Bajoria, an economist with Barclays, wrote in a note.

Traders said any OMO calendar or indication of RBI market support would be crucial.

Markets are also wary of borrowing being increased further later in the year and are eagerly awaiting a second stimulus plan to gauge the likely budget shortfall.