Bond yield drops to four-year low, recovers
Massive profit-selling leads to the bounce-back.
Trading in government bonds began on a euphoric note in response to the aggressive interest rate cut by the Reserve Bank of India and the government’s financial stimulus package.
The yield on 10-year government paper was down to a low of 4.86 per cent, the lowest since October 2004.
But yield on the government bond (8.24 per cent 2018) moved back to a high of 5.20 per cent on massive profit selling. The yield closed at 5.16 per cent, according to data available with the Negotiated Dealing System platform.
This was the first trading day after RBI cut the repo rate, the rate at which it lends to banks and reverse repo rate by 100 basis points each and the slew of steps by the government to boost demand. For a brief period, yield on 10-year paper slipped below five per cent mark. Bond yields went back above 5.10 per cent level on concerns of growing fiscal deficit, dealers said.
The credit offtake has moderated and banks have excess resources. Thus, the system has excess liquidity. “Much of money is chasing few safe avenues like government bonds. This has been driving yields on securities across the board”, said treasury official with public sector bank.
RBI has released huge liquidity by reducing cash reserve ratio (CRR), a port of deposits that banks have to keep with RBI to address concerns of resources. Also, the government has introduced various packages to push demand. But this will come at a cost... “The fiscal deficit will grow when the government borrows more from market to fund the extra expenditure.
A treasury head with small private bank said the market has taken care of all the positive factors. There is worry over deteriorating fiscal health. Going forward, the yields are expected to remain range bound between 4.75 -5.5 per cent with bias towards moving to an upper end of band.
Besides looking for investment opportunity in government bonds, banks would also invest in bonds floated by healthy companies. These companies are trying to take benefit of the sharp fall in yields to raise funds at low yields.
The spread between the 10-year corporate bond and similar tenure gilt paper is around 295 basis points. This wide spread lures investors to purchase corporate bonds in the secondary market. “A lot of primary issuances are also in the pipeline, which indicate that the supply in the secondary market will go up further,” said a dealer with an insurance company.
Tracking the fall in yield on government bonds, spread on corporate bonds is also expected to decline over the period. It may rule between 250-325 basis points as against 325-375 basis points in the third quarter.
Power Finance Corp’s 10-year bonds were traded at 8.05-8.15 per cent compared with 8.35 per cent on Friday. According to Fixed Income Money Market Derivative Association’s reporting platform, bonds worth Rs 314 crore were traded, compared with Rs 1,330 crore on the previous trading day.