10-year bond yield drops to 5.97% in morning trade but closes at 6.02%

The 10-year bond yield fell below 6 per cent in intra-day trade on Friday after the Reserve Bank of India (RBI) committed to buying at least Rs 1 trillion of bonds from the secondary market.

In the morning trade, the yield dropped to 5.97 per cent, but it climbed up to close at 6.02 per cent once it was found that the central bank had refused to sell a new 5-year benchmark paper at the rate demanded by the market. Instead, the RBI forced the primary dealers, or underwrites of the auction, to buy almost the entire stock of the new 5-year benchmark paper at 5.63 per cent.

In the first auction of the fiscal year, the RBI raised Rs 37,853 crore using greenshoe options instead of the planned Rs 32,000 crore.

Still, Friday’s closing was below the previous close of 6.03 per cent. Yields on the 10-year bond have fallen more than 18 basis points since the start of the financial year. This is contrary to what the market was largely expecting in the face of a large borrowing programme by the Centre.

In its own version of quantitative easing (QE), the central bank introduced a G-Sec Acquisition Programme (G-SAP) in the policy, committing how much it would buy every quarter. The bond market expects the RBI to run a G-SAP programme of Rs 3.5-4 trillion in the full fiscal year.

The bond yields rallied in the morning, responding to the choice of securities in the first G-SAP, said Debendra Dash, senior vice president at AU SFB. The central bank said it would be buying the benchmark 10-year bonds in the G-SAP on April 15.

However, the first auction of the financial year started with a huge devolvement. The RBI did not sell Rs 11,000 crore of 5-year bonds at the rate the market was asking for. Rather, primary dealers had to buy nearly the entire stock. 

This soured the mood by the end of the market hours, and the yields climbed up at the end, according to Dash.

However, the mood in the bond market remains upbeat with the central bank’s commitment to buy bonds.

“There has been a favourable turn of events at the start of this fiscal wherein global bond yields have started to cool off from its recent peak and on the domestic side the RBI has continued with its accommodative policy and focus on growth,” said Anand Bagri, head of domestic markets at RBL Bank.

“Markets love certainty and with the central banker committing to buy bonds to the tune of Rs 1 trillion it has sparked quite a sharp rally in the bond prices,” Bagri said.

Bond dealers expect the surplus liquidity to continue in the system and a prolonged pause on rates at least through this calendar year.

 Bagri expects the 10-year bond yield to fall to as much as 5.90 per cent and trade in a new range of 5.90- 6.10 per cent in the coming days, making the borrowing cost for Rs 12.05 trillion of bonds cheap for the government.