State of govt finances to weigh on bond yield trajectory

A decline in inflation, as well as excess liquidity, has resulted in the yield on the benchmark 10-year government bond falling about 10 basis points in the past four weeks. While the yield might continue to fall, it is expected the state of government finances — tax collections and whether or not the disinvestment target is met — will also weigh on its direction.

On Tuesday, the government securities market opened on a strong note, following lower-than-expected retail inflation for September and a strong opening for the rupee. The market largely remained positive, as data on wholesale inflation, released later, showed it had fallen in September.

In intra-day trade, the yield on the 10-year benchmark bond touched 8.36 per cent. However, the market shed its gains due to profit-booking by market participants. At close, the yield stood at 8.4 per cent.

“We have seen the benchmark bond yield softening in the past few sessions due to lower inflation and surplus liquidity. Going forward, tax revenues and the performance on the disinvestment front will influence bond markets,” said Aditi Nayar, senior economist at rating agency Icra.

A senior treasury executive at State Bank of India said the yield would fall further in a gradual manner, reflecting the market sentiment on inflation, liquidity and the macroeconomy. To avoid excess volatility, the Reserve Bank of India (RBI)might not allow sharp movements in either direction.

In a note, STCI Primary Dealer said a dovish stance by RBI, coupled with status quo on key policy rates, could keep the yield on the benchmark 10-year government bond at 8.35-8.45 per cent in the near term.

The next couple of readings on the wholesale and retail inflation fronts are likely to be markedly benign. As such, RBI will want to await further data points for clarity on whether its target of six per cent retail inflation by January 2016 will be met.

Bank of America Merrill Lynch said it continued to expect the yield on the 10-year bond to stand at 8-8.25 per cent in March, adding the unexpected open market operations sale by RBI signalled its intent to keep the yield at about 8.5 per cent for now.