Government bond yields hit lowest level since July 2010

Rally driven by improving trade data and falling commodity prices, may give more comfort to RBI in cutting repo rate further

Government bonds rallied for the fifth straight session on Thursday, with yields dropping to the lowest since July 2010. The rally was driven by improving trade data and falling commodity prices as these two factors are expected to give more comfort to the Reserve Bank of India (RBI) in cutting the repo rate further.

The 10-year benchmark government bond 8.15 per cent 2022 yield fell to 7.75 per cent during the session, the lowest since July 28, 2010. It ended at 7.78 per cent compared with the previous close of 7.80 per cent. On Thursday, the yield had opened at 7.79 per cent.

Earlier this week, Business Standard polled 10 economists and all of them expect the central bank to cut the repo rate by 25 basis points to 7.25 per cent in the monetary policy statement 2013-14 to be announced on May 3. In fact, many economists also expect another repo rate cut after that in this financial year.

Finance Minister P Chidambaram said on Wednesday he expected the current account deficit for FY13 that ended in March, to be around five per cent of gross domestic product and perhaps half that amount in one to two years.

Government bonds held on to their gains after RBI auctioned bonds worth Rs 15,000 crore on Thursday as the absence of a debt sale next week and prospects of a rate cut by RBI ensured robust demand at the auction.

“Absence of auction in the rest of the month coupled with supportive macro triggers and rate cut hopes are expected to move the bond yields in the southward direction,” said Shakti Satapathy, a fixed income analyst at AK Capital. Satapathy expects bond yields to fall fast towards 7.73 per cent levels in the near term.

The one-year overnight interest swap (OIS) fell to a session low of 7.23 per cent, its lowest since January 10, 2011. It closed at 7.26 per cent, versus Wednesday’s close of 7.27 per cent.

The benchmark five-year swap rate fell to a session low of 6.96 per cent, its lowest since October 23, 2012. It ended steady at seven per cent.