Bond bulls bring down 10-year yield below 6% for first time since Feb 12

This was after the RBI assured the market of ample liquidity and another round of secondary market purchase of Rs 35,000 crore

The yield on the benchmark 10-year bond fell below the crucial 6 per cent mark on Wednesday after the Reserve Bank of India (RBI) assured the market of ample liquidity and another round of secondary market purchase of Rs 35,000 crore. 
 
The RBI has often signalled it prefers yields at or below 6 per cent as a lower yield reduces the funding cost for the Centre which has a huge borrowing programme.
 
In an unscheduled press conference earlier in the day, RBI Governor Shaktikanta Das announced various Covid relief measures for individuals as well as the health care sector, while also addressing the liquidity issues of banks and small finance banks.
 
In his speech, the RBI governor said that the domestic financial conditions remain easy on “abundant and surplus system liquidity”, with an average daily net liquidity absorption under the liquidity adjustment facility at Rs 5.8 trillion in April. 
 
Witnessing the softening bias of yields after the first auction of Rs 25,000 crore under the government securities acquisition programme (G-SAP), the RBI will conduct the second auction of Rs 35,000 crore on May 20. This will be within the overall Rs 1 trillion G-Sap 1.0 programme announced for the quarter.  The 10-year yield last closed below 6 per cent on February 12.
 
“While the phased cash reserve ratio hike has not been rolled back, the banking system continues to have sufficient liquidity, thus providing adequate anchor to short-end rates as well,” said Lakshmi Iyer, CIO (debt) & head products, Kotak Mahindra Asset Management.
 
“Markets will draw comfort from the inter-policy announcement and gain comfort from the fact that the central banker may leave no stone unturned in extending monetary support to ward off this pandemic-induced economic strain.”
 

According to Badrish Kulhalli, head of fixed income at HDFC Life Insurance, the operation twist (OT) of Rs 10,000 crore announced last week also helped mend the market mood. “The RBI’s G-SAP announcement, coupled with the OT, indicated that the G-SAP was in addition to the usual OMO/OTs. That was a big positive,” Kulhalli said.
 
Meanwhile, the rupee depreciated for the first time in three trading sessions against the dollar, tracking the strength of the greenback. The rupee ended at 73.91 a dollar, compared with 73.85 on Tuesday. 
 
Besides, the bidding on Friday was very aggressive and there were large trades after the auction. So, the market speculated that the RBI had placed bids at the auction through primary dealers or banks to shore up demand, said experts. That was the second big positive. 
 
“Then, the governor announced the next GSAP for Rs 35,000 crore. So seeing the RBI being active in keeping yields soft, secondary market yields on the 10-year bond has dipped below 6 per cent,” Kulhalli said.
 
Meanwhile, the rupee depreciated for the first time in three trading sessions against the dollar, tracking the strength of the greenback. The rupee ended at 73.91 a dollar, compared with 73.85 on Tuesday. 
 
The near-term forward premiums eased, “leading to unwinding of carry positions”, according to Sriram Iyer, senior research analyst at Reliance Securities.
 
According to Iyer, the one-year implied yield was down to 4.93 per cent from 5.31 per cent on Tuesday, while the one-year forward premium was at 3.67 rupees versus 3.82 rupees at the previous close.