Inching up: 10-year bond yield rises 14 bps since RBI's 25-bp rate cut

The 10-year benchmark government bond yield has risen 14 bps since the RBI's 25 bps repo rate cut, as traders price in the move as the last of the cycle and foreign investors unwind positions

Yields on the 10-year benchmark government bond hardened 14 basis points (bps) since the Reserve Bank of India’s (RBI’s) 25 bps policy repo rate cut on Friday as it was seen as the last reduction in this cycle.

 

On Wednesday, 10-year bond yield inched up 4 bps and breached the psychologically crucial 6.60 per cent mark to settle at 6.63 per cent as foreign investors unwound their positions in both government securities and the overnight indexed swap market, dealers said.

 

Yields on the 5-year and the 15-year sovereign paper hardened 15 bps each this week.

 

The 25 bps policy repo rate cut by the RBI’s Monetary Policy Committee (MPC) is widely seen as the last in this cycle, which has weighed on sentiment, said dealers. The rate-setting panel of the central bank cut the policy repo rate by 25 bps to 5.25 per cent on Friday, lowest in over three years. The repo rate has been cut a total of 125 bps since February.

 

Market participants said that major selloffs by participants, who had built large positions, immediately after the policy announcement pushed the yields higher during the current week.

 

“There was a major selloff by participants, who had taken large positions, right after the policy announcement. The general sentiment in the G-Sec market is that, even though the RBI is set to infuse liquidity, supply pressures will persist, not just this year but even next year,” said a senior executive at a primary dealership.

 

Along with the rate cut, the central bank has announced open market operation (OMO) to purchase government securities to infuse liquidity.

 

Market participants said that offshore traders have been unwinding position in the OIS (overnight index swap) market to book profits ahead of the US Federal Reserve’s meeting. On Tuesday, selling was concentrated in the long end of the curve while on Wednesday, activity shifted to the shorter end.

 

The 5-year OIS rate rose by 2 bps to settle at 5.97 per cent on Wednesday.

 

There was also apprehension around the upcoming OMO purchase auction on Thursday, with many participants uncertain about whether there would be sufficient bid for the securities on offer.

 

Most of the papers are not profitable at current levels, and banks in particular were said to be unhappy with the securities allotted for the auction. This fuelled scepticism about whether the expected ₹50,000 crore replenishment will materialise, said dealers.

 

Stop losses were also triggered on Wednesday, which contributed to the selloff, creating a cascading effect as one participant’s selling forced others to unwind positions.

 

The central bank has announced liquidity measures through OMOs and forex buy-sell swaps. OMOs will involve the purchase of Government of India securities worth ₹1 trillion in two tranches of ₹50,000 crore each, on December 11 and December 18. Additionally, a USD/INR buy-sell swap of $5 billion for three years will be held on December 16.