10-year-bond's yields rise to touch 7%

At a time when inflation is touching new lows, the yield on the 10-year government bonds moved up sharply to close at the 7 per cent mark, reflecting concerns about the government’s huge borrowing programme.

Dealers said that the Reserve Bank of India (RBI) set a higher cut-off yield auction for open market operations and treasury bills, and that buying interest is minimal as there is a huge supply. The overhang of government borrowing continues to put pressure on the market too.

The yield on new benchmark 10-year paper (6.05 per cent 2019) has jumped by 100 basis points in a few trading sessions without much change in the economic environment. It closed at Rs 93.25 On Thursday, implying a yield of 7 per cent, as against Rs 96 implying a 6.61 per cent yield, according to data available with the Negotiated Dealing System.

For 10-year paper, the yields were hovering at 7.0 per cent in early December 2008. The other frequently traded paper (8.24 per cent 2018) saw yield move up by 37 basis points to 7.17 per cent as against 6.84 on Monday.

The annual rate of inflation stood at 2.43 per cent in the week ended February 28, as against 3.03 per cent in the previous week. It was 6.21 per cent in the corresponding week a year ago. This is the lowest rate since June 2002 when inflation had risen by 2.18 percent.

A treasury head at a public sector bank said that, on the one hand, the RBI aggressively cut key rates to indicate a soft interest rate regime but, on the other, the yields are moving up. This would only increase the cost of funds for the government as well as companies.

Besides the Union Government’s borrowings, state governments have also issued 10-year development loans (bonds). This has sharply increased the supply. The cut-off yield of state government paper has also been high in the range of 200-250 basis points. A senior State Bank of India official said there is too much of borrowing by the government, which is pushing yields up.

Dealers said that, while the RBI may cut repo rate and reduce even cash reserve ratio further, its effect on the yield is likely to be limited.

Referring to the adverse impact of elevated yields on banks’ investment books, an SBI official said that all banks will feel the pressure on their treasury earnings and profit. The yield on 10-year paper was around 5 per cent at the end of December 2008. Now it’s higher by 200 basis points. This would erode the value of securities, forcing banks to make provisions.

There is also a concern about the pressure on liquidity next week, as funds to the extent of over Rs 25,000 crore are expected to move out of the system due to the last installment of advance tax by companies for 2008-09. This is in addition to the huge borrowing plans lined up before close of the current financial year.

A securities trader with a public sector bond house said, “We have witnessed hardening across the yield curve. While the yield on long-term bonds has been rising for some time now, the cut-off yield on treasury bills (short-term paper) also moved up.”

Primary issuances of certificates of deposit (CDs) remained high On Thursday as banks rushed to raise funds in anticipation of a rise in CD rates next week as liquidity is seen shrinking, dealers said. Banks raised around Rs 3,500 crore through CDs, compared with Rs 3,000 crore on Monday.

“Rates could rise further next week if liquidity tightens due to the advance tax payments,” said a dealer with a state-owned bank. Three-month CDs were quoted at 6-6.20 per cent compared with 5.70-5.90 per cent.