Govt bond yield at one-month high ahead of US Federal Reserve meet

Traders reportedly adjusted positions in anticipation of an increase in state govt securities supply on Tuesday

Government bond yields surged to a one-month high on Monday, due to an uptick in US yields ahead of the US Federal Reserve meeting outcome scheduled on Wednesday, dealers said. Traders made space in anticipation of a substantial influx of state government securities supply on Tuesday which further aided the yields.

The benchmark 10-year government bond rose by 3 basis points to settle at 7.09 per cent on Monday, the highest since February 16, as compared to the previous close of 7.06 per cent.

Seventeen states and union territories aim to borrow Rs 50,206 crore on Tuesday through the auction of state government securities, marking the highest amount borrowed through state bonds in a single auction. It will be the second last auction of state government securities for the quarter. The notified amount was significantly higher than the calendar amount of Rs 27,810 crore.

“The selling in the market was because of the heavy supply in State Development Loans (SDL) tomorrow (Tuesday),” said a dealer at a state-owned bank. “Then, there is caution because of the FOMC meeting,” he said.

The previous highest borrowing by states in a single auction was on March 24, 2023, when they borrowed Rs 35,821 crore.

“There was technical resistance around 7.08 per cent (yield on benchmark bond), now that it is broken, the yield might climb up to 7.11-7.12 per cent,” a dealer at a private bank said.

Market participants said that primary dealers and mutual funds were the major sellers on Monday. They believe that the supply at the last auction of the state government securities for the quarter might be higher than the current week, which might lead to a further rise in the yield on government bonds.

The yield on the state bonds might harden by 2-4 basis points given the higher supply on Tuesday, they said. At the previous state loan auction, the cut-off yield on the 10-year state government securities was set in a range of 7.36-7.41 per cent.