Bond yields fall 50 bps in a month banks miss the bus

Yields below cut-off at which traders sold bonds to RBI in open market operations.

Speculation that the Reserve Bank of India (RBI) may shift to a pro-growth stance soon has resulted in yields on government bonds declining by around 50 basis points in a month. However, bankers could not book meaningful profits, since they did not hold on to the securities amid an uncertain environment. Currently, the yields are much below the cut-off level at which traders sold bonds to RBI in open market operations (OMOs).

For instance, yields on the 10-year, 8.79 per cent benchmark government bond eased from 8.97 per cent a month ago to below 8.5 per cent. The price of the bond was as high as Rs 102.55 in this period. “We wish we could have held on. But expectations that bond yields would harden further prevailed,” said a treasury head of a public sector bank. “It is a lost opportunity,” said another treasury official of a private sector bank.

RBI conducted OMOs for three consecutive weeks and bought securities of about Rs 25,000 crore. The yields on the bonds auctioned in the OMOs were lower by 25-35 basis points, compared to current levels.

Banks, which are major supporters of the government’s borrowing programme, had shifted 10-year papers from the trading portfolio to the held-to-maturity one to avoid mark-to-market losses when yields had rallied early this financial year. The new 10-year, 8.79 per cent benchmark was, however, kept in the available-for-sale category. According to the Clearing Corporation of India, the 8.79 per cent benchmark is one of the most traded securities, with volumes of around Rs 9,000 crore daily.

“No trader would hold a security for so long in an uncertain environment. One would like to book a little amount of profit and exit, rather than wait and watch,” said a bond trader with a large public sector bank. “A trader sticks to a particular range. Nobody thought yields would fall below 8.50 per cent in a short period.”

Yields may fall further, as deteriorating growth and easing inflation have raised hopes that the central bank would be compelled to cut the policy rate sooner than expected. RBI is scheduled to announce the mid-quarterly policy review on December 16.

Market participants expect RBI may continue with bond buybacks through OMOs to support liquidity, instead of opting for a cut in the cash reserve ratio (CRR). “RBI would like to wait for stronger indications of a decline in inflation before revising the CRR,” said the treasury official. Traders said OMOs would help keep yields low, amid continuous weekly supply of government bonds. According to RBI data, the government raised Rs 3.41 lakh crore through the sale of dated securities up to December 2.