Bond yields harden on higher reading on inflation

Partial devolvement at bond auction on primary dealers

The yields on the government bonds hardened across tenures after the inflation, measured by Wholesale Price Index, for October came higher than anticipated.

Treasury executives said the effect of reading on WPI and consumer price index did weigh on the market sentiment .The substantial upward revision of August inflation data came as a surprise.

The yield on benchmark 10-year security (7.16% GOI 2023) at close was 9.02% as against closing yield of 8.92% yesterday.
The WPI inflation for the month of October was placed at seven% (y-o-y), which came in higher than 6.46% (y-o-y) noted previous month. The inflation for August was revised higher to 6.99% from earlier estimate of 6.10%.

Mohan Shenoi, president - group treasury and global markets, Kotak Mahindra Bank in a scenario when interest rates are rising, the market wants to bring down the duration.

But there is no choice because in Open market operations the RBI is taking short-term bonds and in auction there are long-term bonds. This is resulting in market adding up duration due to which bond yields rose.

The spike in yield also triggered a thought if Reserve Bank of India could further raise policy rate in mid-quarter policy review in December.

N S Venkatesh, chief general manager and head of treasury, IDBI Bank said the spike in yield was immediate reaction and not an indicator of further hardening. The yields are expected to soften on 10-year bond to hover between 8.75-8.95%.

Meanwhile, bond auction held by RBI saw devolvement on primary dealers under one out of four securities. The cut-off for paper maturing in 2020 (8.12% GOI 2020) was placed at a yield of 9.00%.

The amount devolved under this security was Rs 460.50 cr, RBI said in a statement. Other three securities were fully subscribed.