Yields seen falling after bond auctions end for FY14

Government bond yields are seen falling from current level in the near-term as the last auction for this fiscal got over today

Government bond yields are expected to fall from current levels in the near term, with the final auction of these for this financial year got over on Friday. The Street is also expecting inflation for January to soften and this is expected to add positive sentiment in the market.

The yield on the 10-year benchmark bond ended at 8.74 per cent on Friday, compared with Thursday’s close of 8.72 per cent. The Rs 10,000-crore auction on Friday went through smoothly, getting fully subscribed.

“With no more supply of bonds this financial year and with expectations that inflation will come down, bond yields might start trending down. Hopefully, we might see a 8.6 per cent yield level for the 8.83 per cent, 2023 government bond by the end of next week,” said N S Venkatesh, chief general manager and head of treasury at IDBI Bank and chairman of the Fixed Income Money Market and Derivatives Association of India.

Growth in gross domestic product (GDP) during 2013-14 is estimated at 4.9 per cent, as compared to 4.5 per cent in 2012-13, say Central Statistics Office estimates. A GDP growth below five per cent raises hopes of a rate cut. At the same time, the target of the Reserve Bank of India (RBI) is to bring down Consumer Price Index (CPI) inflation to eight per cent in 12 months; this might not allow rate cut expectations to materialise. The data for both Wholesale Price Index (WPI) and CPI inflation for January will be disclosed next week. CPI inflation rose an annual 9.87 per cent in December, while WPI inflation climbed an annual 6.16 per cent in the same month.

“Supply is only one factor which drives bond yields. In the near term, pressure of supply will not be there, due to which market sentiments will be slightly positive. But we shall continue to see state development loan auctions. In the vote-on-account, the government will maintain the same type of net borrowing as (in FY13). In the present scenario, rate cut expectations are absent. The inflation data which will come out next week is crucial. In the next one month, the yield on the 10-year benchmark will trade in a band of 10 basis points on both sides from current levels,” said Badrish Kulhalli, head of fixed income at HDFC Life. The government will seek Parliament's approval for expenditure through a vote-on-account next week.

Earlier this week RBI also canceled the deferred auction scheduled on January 17 amounting to Rs 15,000 crore. The auction was canceled keeping in mind the government's  cash position and funding requirement.