Bond yields harden ahead of new benchmark, rupee down

Bond yields jumped close to the nine per cent mark during intraday trade, as traders sold the current 10-year benchmark bond on Tuesday. Yesterday, the Reserve Bank of India (RBI) had said a new 10-year bond would be auctioned this week. The announcement came after market hours.

Yields on the 10-year benchmark government bond closed at 8.94 per cent, after touching 8.99 per cent in early trade. Such levels were earlier seen in August 2008. Yields had closed at 8.88 per cent a day before. The government has already issued Rs 68,000 crore in the current benchmark bond that offers an 7.80 per cent coupon, payable half-yearly.

“The markets were expecting a new 10-year paper, as the current benchmark had turned illiquid. The new paper may take a few more auctions to become the new benchmark,” said a treasury official of a Mumbai-based public sector bank. The government will issue Rs 6,000 crore of the new security in an auction on Friday. The coupon rate is expected to be in the range of 8.75-8.80 per cent, as current market yields will keep an upward pressure, while RBI may decide on a lower cutoff to avoid a surge in yields.

Meanwhile, the rupee erased last week’s gains, as risk aversion returned across the globe on euro zone concerns. It depreciated by 58 paise on Tuesday to close at 49.27 against the dollar, as investors turned to the safe haven currency.

On Friday, the rupee had appreciated 1.5 per cent as the markets cheered the bailout plans agreed upon by euro zone leaders.

The weak performance of domestic equity markets also weighed on the rupee. According to the Bombay Stock Exchange, there were net fund outflows of Rs 20 crore, as both equity markets fell around 1.3 per cent on Tuesday.

The rupee is expected to be volatile this week, as developments unfold in the debt-stricken euro zone.