Bond yields set to harden on higher govt borrowing plan

With the higher Government borrowing plan announced in the Budget, bond yields are likely to harden in the near future, say traders and analysts.

The 10-year benchmark G-Sec yield is expected to be around 8.5 per cent by the month end. “There is a little bit of pressure on the bond market due to additional borrowing plan of the Government. 10-year benchmark G-Sec is likely to touch 8.50 per cent by end of the month,” IDBI Bank treasury head, Mr N.S. Venkatesh, told PTI.

He, however, said liquidity easing measures by the central bank, such as open market operations, and a possible policy rate cut are likely to ease pressure on yields.

As per the Budget, government would go for gross market borrowings of Rs 5.7 lakh crore, of which market borrowings are slated to be Rs 4.79 lakh crore.

“The market was expecting a gross market borrowing of around Rs 5.4 lakh crore, which has been exceeded by around Rs 40,000 crore. So, this will put some pressure on the market,” Mr Venkatesh said.

Some other analysts also said that higher supply of government bonds would see hardening of yields in the first quarter of the next fiscal.

“With majority of redemptions in FY13 slated for the first half, the Government would have to front-load the borrowing calendar. This would mean borrowing of Rs 15,000-Rs 16,000 crore every week. We expect the yield curve to come under pressure and steepen as we head into next year,” the Canara Robeco Mutual Fund investment head, Mr Ritesh Jain, said.

He also said that 10-year G-Sec will trade between 8.40 and 8.50 per cent in the near future and then inch up to 8.60-8.75 per cent in the next quarter.

SBI Mutual Fund’s Chief Investment Officer Mr Navneet Munot said the Budget has delivered a net borrowing number which is bigger than most market estimates.”Bond markets are likely to treat the budget numbers negatively in the short-run,” he said.

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