Govt bonds recover all losses on short covering; SDL yields surge

Government bonds recovered losses on Tuesday after short covering, with the 10-year yield closing flat at 6.60 per cent while SDL spreads widened sharply to 80 basis points

Government bonds recovered losses by the end of trade on Tuesday on the back of short covering, said dealers.

 

Yield on the benchmark 10-year government bond rose up to 6.66 per cent during the day due to large supply at the state bond auction. However, it settled flat at 6.6 per cent compared to Monday.

 

“The short positions were building up for the past four to five days. There was some short covering by the end of the day on Tuesday. There was a big buyer at the end,” said a dealer at a primary dealership.

 

There was tepid demand at the state bond auction which pushed the yield on 10-year state bonds to a range of 7.27-7.49 per cent, against 7.09-7.17 per cent in the previous week. 

The 10-year state development loan (SDL) yield was in the range of 6.84-6.88 per cent in the first week of April.

 

The rise in state bond yield has been sharper at the longer end, with yields on 30-year SDLs moving from around 6.87 per cent in early April to about 7.54 per cent in August.

 

Fourteen states raised ₹28,892 crore via state bonds at the weekly auction, against the earlier planned ₹34,150 crore as Maharashtra did not accept any amount at the auction. 

 

Fifteen states were planning to raise ₹34,150 crore, compared with ₹20,850 crore calendar amount.

 

“The market does not have the appetite to absorb supplies. The demand at the auction was very poor, and this has widened the yield spread between 10-year SDL and government bonds to 80 basis points (bps), against 47 bps earlier,” said a dealer at a primary dealership.

 

Bond yields have surged across the board despite a 100 bps reduction in the policy repo rate since February, which included a front-loaded cut of 50 bps in the June monetary policy review.

 

A combination of factors like oversupply of long-duration bonds, fading hopes of further policy rate cuts, proposed goods and services tax reductions, and short positions by investors has pushed yields higher over the past couple of months.