Bond yields to scale back to 6.7% levels by March: HDFC Bank

The benchmark bond yields are likely to move upwards from December from the its lows now and may scale back to the 6.7 percentage levels by March, as it does not expect the central bank to be aggressive with its OMO sales, says a report.

The 10-year benchmark bond yields would stand at 6.4 per cent at end July and may drop to 6.3 per cent by September. But the yields would move up to 6.55 per cent by December and hit the 6.7 per cent mark by end March 2018, HDFC Bank said in a note today.

As per the report, the bond yields would be impacted by the sub-2 per cent inflation reading for June and possibly for July which could be positive for the bond market, in the near term.
 

Besides, with the farm loan waivers, pay commission awards and the Uday scheme, state finances are likely to worsen but the entire burden is unlikely to hit the bond markets and whatever does will possibly be spread-out.

The report also said while the latest decision of the central bank to conduct OMO sales has surprised the market in terms of the timing, it does not expect the RBI to be aggressive on this front.

"Although we expect the term-premia to rise because of the OMO sales, the decline in inflation premia is likely to dominate the market sentiment," the report said.

Additionally, the report said global bond yields can go up in response to a shift in monetary policy stance of the major central banks, however, the worldwide uptick is "unlikely to be hasty".

"Against such a backdrop, there could be a downward bias for the domestic bond yields in the near-term," it said, adding markets are likely to sway between two possible scenarios after August: a long-term pause by RBI or a further 25 bps rate cut.

"Thus, the 10-year bond yields could drift lower to 6.3 per cent levels by September (if there is a 25 bps rate cut in August) and a gradual liquidity absorption approach by RBI," it added.

The report observes that "amid rising pressure of monetary tightening on the global front and due to liquidity normalisation on the domestic front, the bond yields could move up again".

"By the end of fiscal 2018, we expect the benchmark yields to trade around 6.7 per cent levels," it said.

"Since the beginning of the current fiscal, FIIs bought around USD 10 billion of domestic bonds, around five times the money they invested in the equities between April and June," it said.