Bond yields to go up as govt borrowing resumes

Yields on government securities are expected to inch up further on higher-than-planned supply in the second half of the current financial year. Last week, the yields on the ten-year benchmark government bond climbed 13 basis points to close at 8.57 per cent, as markets prepared for an auction after a month’s gap.

The Reserve Bank of India (RBI) is scheduled to auction Rs 13,000 crore this week. “I expect the yields on the ten-year benchmark paper to rise to 8.70-8.75 per cent, as markets accommodate higher supply,” said Piyush Wadhwa, executive director and head, rates trading, Nomura securities.

The government borrowed Rs 14,103 crore on Friday, as against Rs 15,000 crore notified earlier. “The market just reflected it is not interested in buying longer-tenure paper,” said Wadhwa. There was devolvement on the 30-year and 15-year paper in the first auction of the second-half borrowing programme.

Pradeep Madhav, managing director of STCI Primary Dealership, said there was a possibility of another rate increase. “However, I do not think this spike in yields last week was in anticipation of another rate increase,” he said.

The RBI will announce half-yearly review of the monetary and credit policy on October 25. So far, the central bank has raised key policy rates by 350 basis points in the monetary tightening cycle that is seen nearing its end soon.

Liquidity for the week remained in the average negative Rs 14,000-23,000 crore range. “There is liquidity as deposits are growing and credit is yet to take off,” said Madhav.

Markets were closed on Thursday on account of Dussehra, a public holiday, while trading was shut on the ten-year paper on Friday ahead of its coupon payment.

The overnight indexed swaps rose on Friday on revived risk appetite after the European Central Bank took steps to tackle debt crisis. The benchmark five-year overnight indexed swap rate closed at 7.27 per cent, up 12 basis points from the previous close, and the one-year rate ended six basis points higher at 7.94 per cent. Swap rates are expected to pick up this week, tracking global cues and crude oil prices.