Yields on gilts seen high on rate rise concerns

Yields on the 10-year benchmark 7.8 per cent government bond could move further up, as rate increase concerns loom in the backdrop of high inflation. Market participants expect at least a 50-basis points rise in policy rates during the rest of the financial year.

“Given the high rate of inflation, the yields may touch 8.5 per cent this week,” said a treasury head of a public sector bank. On Friday, yields on the 10-year benchmark 7.8 per cent government bond ended at 8.35 per cent as against 8.32 per cent on Thursday. Intraday, the bond had risen to 8.37 per cent.

Wholesale price index-based inflation was at 8.66 per cent in April and has remained stubbornly high for over a year, while the food price index rise showed signs of easing. It declined to 7.47 per cent for the week ended May 7, the lowest in 18 months.

In the meeting with bankers here last week, Union finance minister Pranab Mukherjee said inflationary pressures were likely to continue. There was pressure on commodity prices because of shortage of production in certain essential food items and uncertainty in global markets, particularly on products imported by India.

Also, increased government borrowing through short-term instruments such as treasury bills and cash management bills has soaked up liquidity in the system. “The cutoff yields on incremental supply will be at higher levels,” said a bond dealer.

In fact, the auction of the five-year government bond on Friday saw devolvement of Rs 631 crore of the Rs 4,000 crore notified, due to lack of buyer interest.

The cut-off yield was at 8.5 per cent, very close to the cutoff for the 11-year government bond.

The government is scheduled to borrow Rs 11,000 crore this week via treasury bills and Rs 12,000 crore via government bonds.