Bond yields soften on lower than expected trade gap

May go up as RBI stays hawkish which likely to dent banks' trading profit

Yields on government bonds softened today as trade deficit numbers for May was lower than expected. However, with the Reserve Bank of India (RBI) maintaining a hawkish stance, treasury officials said bonds yields may harden which can hit bank’s treasury income.

In its mid quarter review of the monetary policy, the central bank kept the repo rate unchanged at 7.25% due to inflationary pressures arising from a weaker rupee. The cash reserve ratio was also kept unchanged.

The yield on the 10-year benchmark government bond 7.16% 2023 ended at 7.26% on Monday, shows Clearing Corporation of India Limited data. It had ended at 7.31% on Friday. The bond was auctioned on May 17 and at that time the yield was at 7.16%. The yield on the 10-year benchmark was at 7.99% at the start of the fiscal. However, at that time it was an old 10-year benchmark bond 8.15% 2022.

“In the absence of rate cut bond yields are set to go up. I expect the yield on the 10-year benchmark bond to go up by 10-20 basis points by month end. This would read to banks taking a hit on their treasury portfolio,” Said the head of treasury of a public sector bank.

Trade deficit for May was over $20 billion in May as merchandise exports contracted 1.1% to $24.51 billion year-on-year and imports rose almost seven% to $44.65 billion. After rising for four months in a row, exports fell from $24.78 billion in May, 2012 as efforts to curb gold trading in special economic zones led to decline in outbound shipment of the yellow metal by $0.8 billion in May.

A recent report by rating agency ICRA had noted that the decline in the sovereign yield curve, as witnessed during April and May 2013, could boost public sector banks’ profitability in the current quarter.

“Yields on the benchmark 10-year Government securities (G-secs) declined by around 60 basis points (bps) in the first two months of 2013-14, prompting a sharp increase in G-sec trading volumes , which could also be attributed to churning of the investment portfolio with a view to shoring up the profitability indicators,” rating agency ICRA had said.

“We also believe that the 10 year benchmark bond yield priced in the absence of policy initiatives much ahead of the event and while some mild selling by bond traders with particularly itchy fingers could take it temporarily close to the 7.40 level, we expect to revert to a trading range of 7.25‐7.35%,” HDFc Bank said in a note.