Gilt yields at 2-month high

Government bond yields touched a two-month high as the Centre borrowed more and Standard & Poor’s revised India’s sovereign rating outlook from stable to negative.

According to Bloomberg data, the yield on the 8.24 per cent 2018 paper rose 17 basis points to 6.59 percent, while the price, which has an inverse relationship with the yield, fell Rs 1.25 on securities with a face value of Rs 100. In intra-day trade, the yield had touched a low of 6.69 per cent.

The bond market reopened after four days. During the day, the government sold three sets of bonds with the cumulative amount raised at Rs 12,000 crore.

A bond dealer at a foreign bank said that bond yields are expected to remain high due to higher government borrowings during the current financial year. “If yields harden further, banks will see a lot of pressure on fourth quarter results since many of us have to make higher provisions on the credit portfolio too,” said the treasury head at a public sector bank.

Since January, the yield on 10-year government securities has gone up by 134 basis points.

Dealers, however, said that the impact of the S&P move would be marginal as the government did not borrow overseas. The total volume in the government securities market fell to Rs 3,980 crore compared with Rs 4,085 crore on Thursday.

Corporate bond yields harden
Yields on corporate bonds rose by 5-10 basis points on Tuesday tracking government bond yields, while mutual funds continued to invest the inflows received in income funds into five-year papers, dealers said.

According to data from Fixed Income Money Market Derivative Association's reporting platform, nearly Rs 250 crore of bonds were traded on Tuesday, compared with a volume of Rs 200 crore on Friday.

The yields on governments bonds rose by 25 bps intraday. The benchmark 8.24 per cent, 2018 government bond ended at 6.55 per cent, compared with 6.41 per cent on Thursday.

Since two weeks, mutual funds have been buying five-year bonds to invest the inflows received in income fund schemes, dealers said.

"Mutual funds are buying five-year papers as they are finding these papers more liquid from a trading perspective," said a dealer with a foreign bank. Provident funds were also seen buying five-year papers from a trading perspective, dealers said.

However, trade in long-term corporate bonds, including 10-year bonds, was low because of uncertainty over yields amid relentless market borrowing by the central government, dealers said.

IDBI Bank's 10-year bonds were dealt in the range of 9.70-9.80 per cent. Power Finance Corp's bonds maturing in 2011 were dealt at 7.85per cent and Nabard's bonds maturing in 2012 at 8.40 per cent.