Bond yields surpass November 2008 high

Bond yields on government papers have risen further on concern that rising commodity prices and drought could trigger inflation. Thin trading on the back of limited appetite for buying papers added to the pressure. 

The 10-year benchmark bond yield ended up three basis points at 7.34 per cent, having risen to 7.38 per cent during trade, which was its highest since November 20. 

Dealers said the market recovered during the day tracking value buying by market participants. Besides concerns over higher government borrowing, the delayed monsoon and rising crude oil prices were weighing on the market sentiment. 

Most banks were reaching the limit of held to maturity portfolio (HTM), leaving little room to buy more long-dated papers in bond auction. Banks would be reluctant to buy more papers as it exposed them to the risk of taking a hit if the yields moved up further (the prices of bond decline in reverse), said the head of treasury with a large public sector bank. 

The 10-year benchmark (6.90 per cent 2019 paper) closed at Rs 96.95, a shade higher than the closing yield of 7.31 per cent on Friday, according to Negotiated Dealing System (NDS) data. 

The turnover on NDS was Rs 8,150 crore. The top-traded securities were benchmark 2019 (Rs 3,935 crore) and 6.35 per cent 2029 (Rs 1,230 crore) respectively. 

Crude oil touched a 10-month high of $74.72 on August 21. A rebound in prices would add to pressure on the central bank to raise borrowing costs from record lows, said a dealer with a foreign bank. 

Rising yields could hurt the central bank’s efforts to pin down interest rates in order to revive the economy and the government’s efforts to keep a lid on its cost of borrowing. 

Traders said the central bank should immediately take a relook at its open market purchase programme. 

Banks are not asking anything out of the ordinary. It would be okay if the central bank just kept to its promise on open market operations. There was stress in the market and the central bank has to recognise this, dealers said. 

Rupee trades near one-week high
The rupee was near a one-week high as a worldwide rally in stocks and commodities added to optimism that a global economic recovery was gathering pace. 

The Bombay Stock Exchange Sensitive Index rose by 2.6 per cent, the most since August 13. The MSCI Asia-Pacific Index of regional shares rose 2.6 per cent today and the Standard & Poor’s 500 Index climbed 1.9 per cent on August 21 after a report showed purchases of existing US homes jumped 7.2 per cent in July, the most since the tallies began in 1999. 

“The rupee is taking a cue from overseas markets, where sentiment has taken a positive turn,” said Krishnamurthy Harihar, treasurer in Mumbai at the Indian unit of FirstRand Ltd, South Africa’s second-largest financial services company. “Capital inflows may get a boost,” he said. 

The rupee was at 48.615 a dollar at the 5 pm close in Mumbai, compared with 48.605 on August 21, according to data compiled by Bloomberg. It is the worst performer among Asia’s 10 most-traded currencies this month, with a 1.4 per cent loss. 

Offshore contracts indicate bets the rupee will trade at 48.72 to the dollar in a month, compared with expectations of 48.73 at the end of last week. 

Call rates ranged
Money market rates remained rangebound tracking surplus liquidity in the system. Call rates were around 3.10-3.30 per cent.