Govt bond yields harden on large SDL supply, softer OMO cut-off

The yield on the benchmark 10-year government bond settled at 6.64 per cent, against the previous close of 6.60 per cent

Government bond yields rose on Monday as the market is bracing for renewed supply pressure during the January-March quarter.

 

This comes after states and union territories (UTs) announced plans to raise up to ₹4.99 trillion through state development loans (SDLs), which is expected to widen the spread between 10-year central government securities and state bonds that currently stands at around 80-100 basis points (bps).

 

Yield on the benchmark 10-year government bond settled at 6.64 per cent on Monday, against the previous close of 6.6 per cent.

 

“The yields opened with the gap because of the large supply of SDLs,” said a dealer at a primary dealership. “The 6.65 per cent (yield on the benchmark 10-year bond) is being protected because of buying by public sector banks (PSBs),” he added.

 

Market participants said the heavy weekly supply, estimated at ₹40,000-50,000 crore, comes at a time when rate-cut expectations are muted. This limits demand appetite and raises the risk of a near-term uptick in state bonds and government bond yields, despite intermittent support from the Reserve Bank of India’s (RBI’s) open market operations (OMO).

 

“If the benchmark yield breaks 6.65 per cent, then it will move towards 6.7 per cent, and if it retraces then the next stop is 6.6 per cent,” said a market participant.

 

“The SDL cut-off tomorrow (Tuesday) will decide the course of the market,” he added.

 

On Tuesday, none of the states and union territories planned to raise ₹30,100 crore.

 

The SDL issuance in Q4 is higher than the ₹4.73 trillion seen in the corresponding quarter of the previous financial year.

 

Meanwhile, the price cut-off at the OMO for bond purchase auction was lower than market expectation. This further pushed yields higher during the day, said dealers.

 

Bids for the 8.3 per cent 2040 security were turned down at the auction because banks bid higher than the market price for the paper, which the RBI declined.

 

However, the central bank purchased securities worth ₹50,000 crore in line with the notified amount. It received bids worth ₹1.32 trillion.

 

“The cut-off price was 10-20 paisa lower than market level which is why the yield touched 6.65 per cent. But then, PSU buying was there and the level was not broken,” said a dealer at a primary dealership.

 

“The RBI took large amounts in some securities, but still the cut-off price was lower,” he added.

 

The RBI, on December 24, had announced liquidity measures, including purchases of ₹2 trillion through OMO and a three-year dollar/rupee buy-sell swap of $10 billion.

 

Net liquidity in the banking system was a surplus of ₹49,702 crore, latest data by the RBI showed.