Govt bond yields jump on higher supply

Concerns over a huge supply of paper drove yields of government bonds higher On Tuesday. Dealers said yields on gilts closed up to 10 basis points higher amid continuing bearish sentiments. The hardening of money market rates also impacted the sentiments negatively.

The benchmark 6.05 per cent 2019 closed at Rs 96.75, implying a yield of 6.50 per cent as against 6.40 per cent yesterday. The turnover on NDS was noted at Rs 2,985 crore. The top-traded securities on the Negotiated Dealing Platform were 2019 and 7.27 per cent 2013 with a turnover of Rs 635 crore and Rs 340 crore, respectively.

Also, most investors preferred to cut their holdings, eyeing the big auctions scheduled this week. There is just too much of supply hitting the market, leaving very little room for trading, said a bond dealer with a public sector bank.

Eleven state governments raised Rs 12,200 crore through auction of 10-year bonds. The central government will raise Rs 10,000 crore through gilts on Friday. The massive supply of bonds has lead to a situation where gilt prices have continued to fall despite interest rate cuts from the Reserve Bank of India.

The head of a public sector bond house said that there may not be much trading activity because players are going to sit tight and not take any risks before the current financial year ends on March 31. Only after the new fiscal year begins will trades see an uptick.

The central bank may have bought some amount of the 2018 paper to support the price. Price of the 2018 paper had slumped to Rs 109.45 during the day after closing at Rs 110.90 on Monday.

Selling pressure has increased on the 2018 paper in the past few weeks as traders have used all exit opportunities to sell this paper and enter the new 10-year benchmark paper.

Dealers said that results of the state government bond auctions also provided some comfort. “The states’ loans did not throw any surprises because some people were talking about cut-offs of near 9 per cent,” they said. RBI had set the cut-off yield in the 8.40-8.59 per cent band..

Due to a risk-aversion, traded volumes may continue to languish. Traders may also eagerly look for cues on Thursday’s RBI Open Market Operations (OMOs). The central bank intends to purchase securities worth Rs 10,000 crore through auction. RBI is due to release the details after market hours on Wednesday.