Bond yields seen up on borrowing, rate concerns

Yields on 10-year benchmark government bonds have hardened by 50 basis points in the first half of this financial year, on account of four consecutive rate increases in the period. Market participants expect a couple of more quarters before these start cooling off.

On Thursday, yields on 10-year benchmark government bonds closed at 8.44 per cent, up 10 bps from the previous day’s close, as government announced more than planned borrowing for the second half. Yields are expected to cross 8.5 per cent this week as government borrowing resumes. According to the issuance calendar for the second half, the Reserve Bank of India (RBI) will auction Rs 15,000 crore of dated government securities this week. The government will borrow Rs 2.2 lakh crore during October 2011-March 2012, as against Rs 1.67 lakh crore planned earlier. In April-September 2011, the government borrowed Rs 2.5 lakh crore through sale of securities. There will be more issuances in the 10-14 year tenor category for remaining financial year.

To tame persistently high inflation, RBI increased policy rates by 150 bps in April-September 2011. The central bank is slated to announce the second quarter review of monetary and credit policy on October 25.

The overnight interbank call money rate is expected around 8.25-8.30 per cent, as banks will borrow to cover reserve needs towards the end of reporting fortnight. Banks may also resort to borrowing from RBI under the repo window in the holiday-shortened week. As of now, the repo rate is 8.25 per cent. Money markets will be shut on Thursday on account of a public holiday.