Bond yields inch towards 8%

Advance tax, inflation, RBI moves weigh on market.

The yield on government bonds hardened today on apprehensions over liquidity drying up in the near term as companies pay their last installment of advance tax and the Reserve Bank of India raising short-term policy rates.

Dealers said the market sentiment could see yield on 10-year benchmark (6.35 per cent 2020) testing the 8 per cent mark. The worry on the government borrowing calendar — though it will borrow less on a net basis in 2010-11 — and inflationary pressure due to a hike in excise duty on oil products are also driving up yields.

The yield on the 10-year benchmark at close of trade was 7.95 per cent, eight basis points more than the previous close, according to data available with the negotiated dealing system (NDS).

J Moses Harding, executive vice-president, IndusInd Bank, said companies would begin making arrangements for the fourth instalment of income tax by March 15. The 10-year paper may see yield moving in band of 7.85-8.15 per cent in March.

The Union Budget’s borrowing estimates and fiscal targets were in line with market expectations. But, excise on the oil products led to fear about inflation and inability to pass the burden on consumers.

Citi India said it saw yields at 7.75-8 per cent levels. But, inflation breaching double-digits would likely result in more aggressive tightening and yields edging to 8.5 per cent.

RBI has made its intention clear about putting an end to the easy money policy to manage inflationary expectations. There is expectation that it may raise repo and reverse repo rates in April, when it will unveil the annual monetary and credit policy for 2010-11.

KR Kamath, chairman and managing director of Punjab National Bank, said while there were near-term worries on RBI policy, the yield may not cross the 8 per cent level by the end of March.

Ananth Narayan, managing director, financial markets, Standard Chartered Bank, said, “We expect bonds to be on the weak side. While the borrowing programme outlined in the Budget was according to expectations, it is still a large number and will be tough to manage. We expect bond yields to breach the 8 per cent mark by April”.

Yields may continue to move upward, awaiting clarity on the borrowing calendar for 2010-11, which would be unveiled in the second fortnight of this month. Given the size of the borrowing, the market expect weekly bond issuances of Rs 12-15,000 crore from April.

Bankers dread that hardening yields would hit their bond portfolios and they would have to make a provision for value erosion. But it is also an opportunity for some investors to pick up paper at lower prices (to get better yield). “We have seen such value-buying in the market, though it is subdued”, a said fixed income dealer with a foreign bank.