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India’s benchmark yield jumped to the highest in two years on Monday in the backdrop of rising US Treasury yields, continuous supply of State Development Loans and Government Securities (G-Secs), and the inflationary impact of rising crude oil prices.
The yield on the 10-year benchmark G-Sec/GS (coupon rate: 6.10 per cent) surged about 5 basis points on Monday to close at 6.59 per cent (previous close: 6.54 per cent) and its price declined about 32 paise to close at ₹ 96.58 (₹96.90). Bond yield and price are inversely co-related and move in opposite directions.
The yield of the 10-year benchmark paper soared about 14 basis points and its price dropped about 93 paise vis-a-vis December-end closing level.
Rising yields in the secondary market has implications for borrowings by the Centre and States as fresh borrowings will come at a higher cost.
Referring to the Reserve Bank of India’s announcement that the government will borrow ₹13,000 crore via a new 10-year (New GS 2032) paper on January 14, Lakshmi Iyer, CIO-Debt & Head-Products, Kotak Mahindra Asset Management Company, said: “So, tomorrow, I think, some short-covering will be there. The market will rebound a little bit. But, otherwise, the market is worried about supply. There is continuous supply of State loans and G-Secs. There is no demand. US 10-year has gone past 1.80 per cent. This is proving to be a dampener.”
Lakshmi Iyer observed that though the new 10-year has been announced, that is a small respite. “We do also have a State loan auction tomorrow, which is another negative. Plus, the RBI has been doing OMO (open market operation) sales. So, all these are negative factors right now… the sentiment is not very positive for bond yields,” she said.
The cut-off yield
Lakshmi Iyer estimated that the cut-off yield of the new GS 2032 at the Friday weekly auction could be 5-7 basis points lower than the prevailing secondary market yield of the extant 10-year benchmark G-Sec. Yield of another widely traded paper — 6.67 per cent GS 2035 — has risen about 16 basis points, with its price dropping ₹1.40 since December-end.
The latest Financial Stability Report of the RBI underscored that the quarterly weighted average cost of incremental government borrowing has inched up, in line with market benchmark yield movements. The report cautioned that the Centre’s repayment obligations (difference between gross and net borrowings) indicate a significant uptrend going forward, implying that gross borrowings are likely to remain elevated notwithstanding fiscal consolidation.
Radhika Rao, Senior Economist, DBS, in a recent report, observed that an unfavourable global environment coupled with caution over a heavy fiscal borrowing pipeline, liquidity withdrawal, rise in oil prices, and lack of direct support from the central bank have driven 10-year G-Sec yields to near 20-month highs, past 6.5 per cent.
“Apart from the Centre’s borrowings, States are also set to borrow a high ₹3.24-lakh crore in 4QFY22 (1Q22). “While we foresee limited room on the downside, some form of support via secondary market bond purchases might be forthcoming given the sharp one-sided rally in yields, which will help cap a further near-term increase,” she said.
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