Bond yields up on issuance of new security, inflation concerns

Bond yields hardened on Friday, as the government issued new security with 10-year maturity, amid fears of rising inflation that built upward pressure on the debt market. The yields on the old benchmark bond maturing in 2021 closed at a three-year high of 8.97 per cent, which is seven basis points higher than its previous close, as bond dealers unwound positions in the paper to make room for the new benchmark.

Earlier in the day, Reserve Bank of India auctioned Rs 6,000 crore worth of new 10-year government security. The central bank had set 8.79 per cent as the cut-off yield.

The coupon rate is the highest level for a benchmark 10-year bond since August 2008. “The cut-off yield was on expected lines as the current benchmark was trading much higher,” said Pawan Bajaj, general manager, treasury, Bank of India. “Usually, there is a spread of 10-15 basis points between yields on the old and the new benchmark.” The government has already issued Rs 68,000 crore in the old 10-year benchmark bond.

Dealers said yields on the new benchmark would stay high till a couple of more issuances in the security. “Also, there are concerns that fuel price hike will push up inflation rate further,” one of them noted.

According to the issuance calendar, the government will raise Rs 2.2 lakh crore in the second half of the current financial year. RBI has announced auction of Rs 13,000-crore worth of government bonds next week. This includes issuance of new a 13-year security. Pointed out a bond dealer with a Mumbai-based public sector bank: “Banks generally buy up gilts of up to 10-year maturity. The tenures will be longer for insurance companies and pension funds.”