The Hindu Business Line : Bond yields rise on panic selling — Inching up to touch 7 pc on benchmark paper

The yield on the ten-year benchmark Government paper, the 7.38 per cent 2015, on Thursday touched a high of 6.99 per cent triggered by nervous traders, many of whom had breached their `stop-loss` levels.

Most leading primary dealers are bracing themselves for substantial losses in their books as a result of the sharp rise in bond yields during the last fiscal. Many dealers were offloading their portfolio, in order to stem further losses as a result of the persistent rise in bond yields in the current fiscal, said analysts.

"After the recent auction, traders were expecting some buying interest to come in, but this has not happened. Yields are also gradually going up. So there was some panic, which resulted in a chain reaction. Some had breached their stop-losses so they had to sell," according to Mr Pradeep Madhav, Executive Vice-President, IDBI Capital Markets Ltd.

"Everyone is bargain hunting. There is no buying support from investors. Oil prices are also inching up. So there is certainly some concern over where the bond yields may be headed. If the situation continues, the 10-year paper will cross 7 per cent shortly," he said.

On Tuesday, the central bank auctioned a 7-year paper, the 6.85 per cent 2012, the cut-off yield, based on its price, worked out to 6.80 per cent.

Dealers said the yield on the 7-year paper was fixed higher than was expected, and, therefore, the rest of the market was aligning itself to that yield.

This has resulted in the yield on the 10-year paper, that was trading at 6.70 per cent YTM on Tuesday, inching up by over 20 basis points in just two days.

Since April 1, the 10-year benchmark yield has surged by 32 basis points from 6.67 per cent to 6.99 per cent.

In November 2004, the 10-year paper was dealt at 7.25 per cent.

Dealers said that while the market may have already discounted a marginal rise in oil prices, there are concerns on how the domestic oil prices may be headed in the medium term.

There is a feeling that any further rise in oil prices will impact inflation, which was ruling at 5.11 per cent as on the week ended March 19.

"If oil prices surge and rate of inflation continues to rise, it will impact the fiscal deficit and result in higher borrowings which means the yields will remain under pressure," said a dealer.

"For now, there are no real investors in the market and there is a lot of worry. Banks are simply not buying gilts. Instead they prefer to place funds in the reverse repo because they have become risk averse. Perhaps they will come off the fence once the market stabilises," he said.

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