Bond yields soften on lower-than-expected trade gap

Might go up as Reserve Bank stays hawkish; to dent banks' trading profit

Yields on government bonds softened today as the trade deficit numbers for May were lower than expected. With the Reserve Bank of India (RBI) maintaining a hawkish stance, treasury officials said yields could harden, which might hit bank's treasury income.

In its mid-quarter review of monetary policy, the central bank kept the repo rate unchanged at 7.25 per cent due to inflationary pressure arising from a weaker rupee. The cash reserve ratio (CRR) was also kept unchanged.

The yield on the 10-year benchmark government bond 7.16 per cent 2023 ended at 7.26 per cent today, shows Clearing Corporation of India Limited data. It had ended at 7.31 per cent on Friday. The bond was auctioned on May 17 and at the time, the yield was 7.16 per cent.

The yield on the 10-year benchmark was at 7.99 per cent at the start of the financial year. However, at that time it was an old 10-year benchmark bond 8.15 per cent 2022.

"In the absence of a rate cut, bond yields are set to go up. I expect the yield on the 10-year benchmark bond to go up by 10-20 basis points by the month-end. This would read to banks taking a hit on their treasury portfolio," said the head of treasury of a public sector bank.

The trade deficit for May was over $20 billion, as merchandise exports contracted 1.1 per cent to $24.51 billion year-on-year and imports rose almost seven per cent to $44.65 billion.

After rising for four months in a row, exports fell from $24.78 billion in May 2012 as efforts to curb gold trading in special economic zones led to a decline in outbound shipment of the yellow metal by $0.8 billion this May.

A recent report by rating agency Icra had noted the decline in the sovereign yield curve, as witnessed during April and May, could boost public sector banks' profitability in the current quarter.

"Yields on the benchmark 10-year government securities (G-secs) declined by around 60 basis points (bps) in the first two months of 2013-14, prompting a sharp increase in G-sec trading volumes, which could also be attributed to churning of the investment portfolio with a view to shoring up the profitability indicators," rating agency Icra had said.

"We also believe the 10-year benchmark bond yield priced in the absence of policy initiatives much ahead of the event and while some mild selling by bond traders with particularly itchy fingers could take it temporarily close to the 7.40 level, we expect it to revert to a trading range of 7.25-7.35 per cent," HDFC Bank said in a note.