Bond yields might remain steady in coming days

Bond dealers are a happy lot these days and Tuesday’s monetary policy review has given them more reason to cheer.

Since finance minister Arun Jaitley presented his budget, limiting the fiscal deficit numbers within the targeted 3.5 per cent of gross domestic product, bond yields have fallen. On Tuesday, the Reserve Bank (RBI) said it would infuse more long-term liquidity in the system, and allow banking system liquidity in a neutral zone from a deficit mode earlier. More liquidity would mean demand for bonds, thus making the debt papers rally.

Yields on the 10-year bond closed flat on Wednesday from Tuesday’s 7.46 per cent.

On Tuesday itself, bond yields had increased a little bit after the policy. However, the shorter term bonds rallied even on Wednesday. For example, yields on the bond maturing in 2020 fell four basis points (bps) to 7.33 per cent. This was the second most traded paper on Wednesday, following the bond maturing in 2030, the yields on which fell by two bps.

Bond traders say the yields could have inched up further had RBI not announced its slew of liquidity measures. One should recall here that bond yields have actually fallen about 50 bps since the budget presentation on February 29. Hence, there was limited scope for yields to fall.

In addition, some had expected RBI to cut more. “Some were expecting a 50 bps cut on Tuesday. That had some impact in the market but, overall, the market is happy being where it is,” said Harihar Krishnamurthy, head of treasury at First Rand Bank.

Not only is the central bank providing support through secondary market bond purchase but the weekly auction size is also limited to Rs 15,000 crore a week. In April, bonds worth Rs 43,614 crore are maturing. Liquidity has also started improving as the surplus cash balance of the government has fallen sharply to about Rs 81,000 crore, from Rs 1.5 lakh crore at end-March.

“RBI’s measures were more than what the bond market expected,” said Devendra Dash, senior bond trader with DCB Bank. He expects the 10-year bond yield to reach 7.25 per cent in two to three months. Krishnamurthy expects the 10-year yields to remain anchored around 7.4 per cent in the near term.