Bond yields seen rising on concerns of debt fund redemptions

Bond yields are seen rising due to concerns that there would be redemption of debt mutual funds. The fears had built up after Finance Minister Arun Jaitley proposed on Thursday the long-term capital gains tax on debt-oriented mutual funds will be hiked. Traders have already started trimming their portfolio and selling pressure is seen continuing even next week.

The yield on the 10-year benchmark government bond ended stable at 8.77 per cent on Friday. The yield had risen to 8.84 per cent during intra-day trades, a level last seen on May 20. The yield had ended at 8.86 per cent on May 20.

“People fear redemption of mutual funds. Traders have been selling government bonds due to this fear,” said the chief investment officer of a fund house.

The government proposed to raise long-term capital gains tax on debt-oriented mutual funds to 20 per cent from 10 per cent. However, it has proposed to increase the period of holding in respect of long-term debt fund units to 36 months from 12 months.

“A large portion of institutional money will start flowing out of debt mutual funds due to this. The retail side will not be much affected,” said a fund manager.

There are talks that the Reserve Bank of India (RBI) will soon auction a new 10-year bond which shall replace the existing 10-year benchmark. Due to this expectation, traders are selling the existing 10-year bond.

The yield is seen rising further next week and may breach the 8.80 per cent level, said bond dealers.

Meanwhile, the government bond auction worth Rs 15,000 crore sailed smoothly on Friday.