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Commercial banks are expected to make trading losses with yields of government hardening during the July-September quarter, tracking a sharp rise in US bond yields.
Yield on the benchmark 10-year US Treasury bond rose by 73 basis points (bps) in the July-September period. Yield on the 10-year benchmark government security rose 10 bps during the quarter to settle at 7.22 per cent on Friday. Yield on the 5-year paper hardened 15 bps and for the 14-year bond, yield went up by 11 bps.
“Based on how people are positioned, or how they have traded across the quarter, there is a possibility that some banks will report a trading loss. Probably, they will report a larger MTM (mark to market) loss in terms of provisioning,” said the head of treasury at a private sector lender.
“We have seen how worse it has got over just the last three trading sessions. We had to bear a fair amount of pain because yields were moving up. And, the fact that US yields are not cooling off is putting a lot of pressure on domestic yield,” the official added.
Global factors remained unsupportive during the second quarter, as central banks across the globe hiked rates because the inflationary pressure persisted, and data did not change to the extent of expectations.
“The rise in yields was in line with the hawkish stance taken by all the central banks. Earlier, people were expecting rate cuts in the third or fourth quarter (by RBI), but that has also been pushed further. That is also the reason for the recent spike in bond yields in spite of getting included in the bond index,” Arun Bansal, executive director, head of treasury at IDBI Bank.
The benchmark yield had fallen by 19 bps in the first quarter due to the overall positive market sentiment after the Monetary Policy Committee decided to keep the repo rate unchanged at 6.50 per cent, in its meeting on April 6.
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The domestic rate-setting panel paused the rate hike cycle after six consecutive rate hikes aggregating to 250 bps since May 2022, thereby prompting traders to stock up on government bonds betting that the committee's next action would be a rate cut.
“Globally, there is a lot of uncertainty about where the interest rates peak and how long they will stay there. This disquieting situation is pushing the US long-term yields higher and giving the strength to the US dollar. Domestically, we have a comfortable situation and inflation is expected to go below 6 per cent for September amid a stable currency,” said V.R.C. Reddy, head of treasury at Karur Vysya Bank.
