India’s benchmark 10 year bond yields are scripting a story in stark contrast to stock markets. There was a bond rout in the bond market on Thursday after Finance Ministry Arun Jaitely finished his budget speech. The 10 year yield, a gauge of liquidity and government risk premia, hit a 22-month high to close at 7.60 per cent. It gained over 3 per cent from a low of 7.37 per cent.
“Bond markets are giving a signal that stock markets are not wanting to read,” said Prateek Agarwal , Business Head, CIO, ASK Investment Manager. “An 18 basis points spike in bond yield on the Budget say shows that they are not happy with government’s fiscal map. Even if bond markets do not destroy the narrative for equity bull run, sharp moves are a matter of concern.”
India has made consistent efforts to contain bond yield spike in the past few months. The government cut its borrowing this financial year and even Reserve Bank of India called off its auction but the bond yield roared back after a small dip and made new highs. Yield and bond prices are inversely related. Bonds see a sell-off when yields spike.
Key factors at play
Globally, investors have been rattled by spike in benchmark bond yields of major economies including the US. Mounting optimism of strength in economic recovery has buoyed equities, which witnessed the best start to a year since 1987. But concerns of quantitative tightening has put the bond markets in a tailspin.
Rising oil prices, government’s PSU re-capitalisation and likely shortfall in GST collections are among key factors that have shaken the domestic bond markets while stocks are still in euphoria.
Finance minister Arun Jaitley in the budget revised his fiscal deficit target for 2018-19 to 3.3% of the gross domestic product (GDP) against the earlier target of 3%, after breaching the deficit target for 2017-18. While the budget estimate of fiscal deficit for 2017-18 was 3.2% of the GDP, the revised estimate is now 3.5% of the GDP, the same as 2016-17.