Bond yields to ease on revenue mop-up

Jaitley said revenue targets for FY15 will be surpassed; market foresees hike in FII cap in govt bonds

After moving up sharply this month, yields on government bonds are expected to find some support at these levels.

This seems likely after Finance Minister Arun Jaitley said the revenue collection targets for FY15 would not only be achieved but surpassed. Besides, there is an expectation in the market the FII limit in bonds might be enhanced.

The yield on the 10-year bond ended at 8.66 per cent on July 2 and been rising since in most trading days. On July 14, the yield ended at 7.81 per cent, its highest level since May 20, when it closed at 8.86 per cent.

“There was selloff due to expectations of a new 10-year bond. Besides, traders were thinking the FII limits might be enhanced. If this happens, the yields can comes down,” said N S Venkatesh, executive director and head of treasury at IDBI Bank.

Experts say it is becoming difficult for banks to keep buying bonds, due to which the FII limit enhancement is needed. “The hope will always be there for raising the limit. Unless they bring in FIIs, it is very difficult for local banks to keep buying G-secs. Yields have been rising because there is no further demand for bonds by banks. For so many months, there have been no open market operations, due to which there is no exit available for banks,” said Rajesh Verma, vice-president, treasury, Development Credit Bank.

The rupee on Monday finished two paise down at over one-month low level of 60.30 on dollar demand from banks and importers.

Data from National Securities Depository Ltd showed as as Friday, 97 per cent of the limit for FII and Qualified Foreign Investors in government debt (auctions) had been filled.

In the FIIs debt limit auction held today for government debt, the bidding turned out quite aggressive with the cutoff being above 15 bps as the quantum on offer was limited to Rs 2,521 crore.

The total market demand was worth Rs 4,857 crore.