Traders book profit as yields soften

But this profit booking spree may not continue longer as yields are once again seen rising from current levels

Fund houses, banks and insurance companies have started booking profit with the yield on the 10-year bond beginning to soften.

Since the bond auctions started earlier this month, yields had increased notably with the 10-year bond rising to 9.1 per cent. However, yields came down later owing to heavy demand for these bonds at higher yields.

“Fund houses had booked profits when the yields started falling. There are two concerns in the market. If El Niño takes up shape it shall impact food inflation and due to the Ukraine crisis, crude prices are shooting up. These two factors may lead to inflation inching up. From now till the election results, the yield on the 10-year bond may trade in the range of 8.75 per cent to 8.95 per cent,” said Dwijendra Srivastava, head of fixed income at Sundaram Mutual Fund.

Even insurance companies had resorted to profit booking. They typically buy bonds of the longer maturities as they have assets of longer duration. “We have been booking profits since yields started falling. We shall again buy bonds when the yields rise,” said the head of fixed-income head at a private life insurance company.

However, the profit-booking spree is unlikely to continue for long as yields are once again seen rising from the current levels. Traders believe the rise in yields is due to bond auctions held every week, which constantly adds supply to the market.

According to the issuance calendar of marketable dated securities, the Reserve Bank of India (RBI) plans to auction bonds worth Rs 3.68-lakh crore in the first half of the financial year. Besides that, the Street also feels inflation might accelerate further in the future. Although RBI had said it was willing to look through transient increases in consume price index (CPI)-based inflation, the Street believes that at some point in the current financial year, RBI might once again raise the rates.

The headline CPI inflation in March accelerated to 8.31 per cent year-on-year from a 25-month low of 8.03 per cent in February. The yield on the 10-year bond ended on Monday at 8.85 per cent, compared with Friday’s close of 8.88 per cent. The yield on the 10-year bond rose to 9.1 per cent on April 7, the highest level for benchmark 10-year since November 22.

“Profit-taking had happened in the bond market on Wednesday, Thursday and Friday. Today, traders were consolidating their positions and waiting for fresh triggers,” said Anoop Verma, vice-president for treasury at Development Credit Bank.

The market awaits the outcome of the elections and traders believe the near-term the bond market would see a rally if a stable government comes to power.