Three things happened last week that made happy bond traders trim their long positions, at least, to a certain extent ahead of the second half borrowing calendar set to be released this week.

US treasury yields shot up after the Federal Reserve stated it could cut back on its bond purchases beginning November and conclude the process by the middle of 2022. The 10-year treasury yield climbed to 1.45 per cent on Friday from 1.37 per cent, the week before. The proximity of the taper process and the expectation of US Fed Funds rate to be increased by the end of 2022, brought forth risk-off trades in bond markets. The G-sec yields too rose from 6.14 to 6.19 per cent after the FOMC meeting. As one bond trader described, “When the US sneezes, the rest of the world catches a cold.”

And as if that wasn’t enough, crude prices continued to rise for the third straight week and hit close to three-year highs over global output disruptions, tightening inventories and persisting demand.

Key events back home

Higher crude prices tend to negatively impact bond prices due to the impact they have on fuel inflation and monetary policy decisions. On the domestic front, the Reserve Bank of India did come out with the much awaited G-SAP auction. The Central bank announced a simultaneous purchase and sale of securities which means the net liquidity injection into the market was nil. The Central bank conducted purchases of long tenor bonds maturing in 2028, 2031, and 2035, cumulatively amounting to ₹15,000 crore while selling short-tenor bonds maturing in 2022, also amounting to ₹15,000 crore. Next week too, the RBI will be conducting a similar operation of simultaneous purchase and sale of long and short tenor bonds, respectively. Bond market participants say that although it was a minor dampener, they have come to terms with the fact that the RBI may not be too comfortable with the high amount of liquidity prevailing in the market.

The benchmark yield hit 6.19 per cent last week having risen from the lows of 6.12 per cent seen the week before.

Going forward, the second half borrowing calendar and the monetary policy outcome in early October will be key events. In case the second half borrowing figure comes below ₹5-lakh crore, the benchmark yield could retest the 6.1 per cent level. However, if the borrowing figure is higher than ₹5.5-lakh crore, the 10-year yield could breach the 6.23 per cent level, traders say.

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