India’s sovereign bond market is on tenterhooks again.
Just days after announcing measures to lower yields, the central bank has given signals that traders interpret as a lack of interest from authorities in pushing rates down further.
The yield on the 5-year bond has climbed 29 basis points so far in the three trading sessions to Tuesday while the rate on 10-year bonds is up 16 basis points, retracing much of the earlier fall. The quick turn in sentiment shows a tug-of-war between the hopes of the bond market and the central bank’s approach to absorbing a record supply of debt from the government.
Late in August, the Reserve Bank of India had announced steps to cool yields, including allowing banks to hold more debt without having to mark losses, fresh rounds of Federal Reserve-styled Operation Twists and liquidity injections. However, in a change of tone, at Thursday’s Operation Twist, the central bank accepted only 71.3 billion rupees ($970 million) of bonds out of a possible 100 billion rupees, and on Friday, it again surprised markets by buying bonds at higher-than-expected yields.
The RBI also said it would inject one trillion rupees via 56-day repo operations while offering to take back longer duration one- and three-year cash.
“The RBI seems to be giving some conflicting signals which are creating skittishness in the market,” said Pankaj Pathak, a fixed income fund manager at Quantum Asset Management Ltd. in Mumbai. “There is nervousness on possible extra borrowing ahead of the second half borrowing calendar,” which is due by end-September.