Bond yields drop below 9%

Falling crude oil prices trigger a rush for govt securities.

The yield on the benchmark ten-year paper fell below 9 per cent to 8.96 per cent on Tuesday after a gap of over four weeks, according to the data from the Negotiated Dealing System (NDS) of the Reserve Bank of India (RBI).

The yield had shot past 9 per cent to close at 9.15 per cent on July 2 from the previous day’s close of 8.66 per cent following the higher inflation data.

According to dealers, crude oil prices fell below $120 a barrel, triggering a rush for government bonds. The market is of the view that moderate crude oil prices will bring down the demand of funds from oil companies, easing the fiscal deficit.

 

The price of the benchmark ten-year paper went up by Rs 1.43, while the shorter end of the maturity witnessed prices moving up by Rs 1.30 and the longer end by Rs 1.50. Brisk trading in the government paper and the consequent fall in yields will also help the government borrowing programme since borrowing costs go down. Incidentally, RBI would be auctioning a ten-year paper 8.24 per cent 2017 on Friday.

Volumes in the government securities market went up to a high of Rs 5,745 crore.

Softening yields of government securities also pushed down the yields of the overnight interest rate swaps (OIS).

Yields on the one-year segment, which recorded the highest volume, fell by 36-40 basis points from 9.58 per cent to 9.22 per cent. In the two- to five-year maturities, yields fell below 9 per cent.

The OIS market is a derivatives product based on the underlying of the interest rate on government securities. When a bank buys a government security, it locks itself into fixed rate of interest of the market. This risk of running interest rate liability of the fixed rate is offset by a reverse transaction in OIS, wherein it receives the fixed rate of interest and pays a floating rate of interest.

Liquidity, on the other hand continued to remain tight and RBI had to infuse around Rs 22,790 crore into the system.

Incidentally, call rates (the overnight money) and ten-year yields are ruling at the same level at 8.96 per cent. Therefore, at every positive trigger, banks are looking for good investments.

Moreover, the market is expecting additional liquidity from the government expenditure which it is expected to start in the form of disbursement of the debt waiver funds.