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10-year bond yields hit three-year high, cross 8%

Later, the yields rally lost steam and the bond yield fell to 7.931% at 12:26 pm. The rise in yields comes two days after the monetary policy committee raised repo and the reverse repo rate each by 0.25%. The 10-year bond yield closed at 7.917% rising 1.06% on June 6, the day when the central bank raised key rates.

twitter-logo BusinessToday.In        Last Updated: June 18, 2018  | 10:45 IST
10-year bond yields hit three-year high, cross 8%

The 10-year bond yields rose above 8% mark in the start of trade today for the first time since May 2015 amid concern over rise in inflation and fiscal deficit. The yield on 7.17% bonds due in January 2028 rose to 8.033% in early trade.

Later, the yields rally lost steam and the bond yield fell to 7.931% at 12:26 pm.

VK Vijayakumar, Chief Investment Strategist at Geojit said, "Even though RBI' s stance was neutral in the June policy, the market feels that there will be one more hike by 25bps this FY. The market is discounting this. The central bank had made it clear that the monetary response would be data dependent. The most crucial data is the crude price. We have reached a situation where the bond yields are directly correlated with crude. If crude goes up, bond yield goes up. Yesterday, crude went up by close to 2 dollars."

The rise in yields comes two days after the monetary policy committee raised repo and the reverse repo rate each by 0.25%. The 10-year bond yield closed at 7.917% rising 1.06% on June 6, the day when the central bank raised key rates.

"The market is factoring one more rate hike as demand for credit is rising and deposit growth is at five-year low leading to tighter liquidity in the system. Banks have been steadily raising interest rates since last 2 months," said Anita Gandhi, whole Time Director at Arihant Capital markets.

On June 7, the bond yield closed at 7.993% rising 0.96%, taking the two-day gains since the RBI policy to nearly 2%. Meanwhile, the Indian rupee slipped in early trade today falling 34 paise to 67.46 per dollar compared to close of 67.12 level on Thursday. Retail inflation moved up to 4.58 per cent in April due to hardening in prices of cereals, meat, fish and fruits.

Mahendra Jajoo, head-fixed income at Mirae Asset AMC said, "Bond yields have already been rising in the last 6 months due to a sharp surge in global crude oil prices which recently topped the $80/bl mark, sticky core inflation bordering 6% mark, the upper edge of RBIs 4-6% band, recent sell-off in emerging markets given Fed's series of rate hikes, balance-sheet shrinking measures and lack of participation by PSU banks and selling by FPIs. The rate hike by RBI was also accompanied by two crucial measures which further dented the already punctured sentiments. First, allowing banks an additional 2% of their existing government bond portfolio held as statutory liquidity ratio (SLR) towards liquidity coverage ratio (LCR). This potential reduces demand for govt bonds by PSU banks allowing them to lend more to industries. This as a side benefit eased the money market yields which had spiked last month due to tightening liquidity.

Second measure by RBI is to move towards market price-based valuation of state govt bonds which were hitherto valued at a fixed spread of 25 bps over corrresponding central govt securities. This would further put pressure on banks profitability as the state govt bonds have been trading at spread well above 25 bps. That RBI has allowed the banks to spread the MTM losses on this count to be spread over a period of four quarters is of little consolation.

With Fed set to hike rates another time at its meeting scheduled for week June 11-17 and oil prices still to ease even as OPEC has shown inclination to increase output, the bond yields seems set to face further headwind in coming months. While the timely arrival of monsoon rains and recent pick up in GST collections are little mercies for a belegaured bond markets, the hanging sword of MSP revision, continued volatility in emerging markets and increasing uncertain political space will possibly keep the bond traders' mood downbeat."

Amit Kachroo, Managing Partner at Aaneev Wealth said, "10-year Bond yields have been rising and it is a well-known fact that when yields go up prices go down. So when bond yields are moving upwards, the debt mutual funds might come under pressure as the prices of underlying holdings will come down. The longer duration government bond funds can give negative returns in short term and when it comes to shorter duration funds, the returns will be positive. So it will be advisable to invest in an accrual based fund. Rising bond yields also give us the impression of the economy as to what is going on like liquidity is low and government borrowings are high in the market. It also helps us in tracking the monetary policy, inflation etc. Investors should stick with short duration bond funds as they are likely to give better returns than longer duration funds. As far as equity market goes, investors who are risk averse and were planning to invest in balanced funds otherwise may invest in accrual debt fund as prices will be lower thereby giving a decent return with less risk. Bond yields might not soften from here as pressure is building on inflation from higher commodity prices."

The inflation based on Consumer Price Index (CPI), a key data factored in by the Reserve Bank while deciding interest rate, was 4.28 per cent in March. The inflation was at 2.99 per cent in April last year. The CPI index had been declining since January this year. Inflation based on wholesale prices spiked to 3.18 per cent in April on increasing prices of petrol and diesel as well as fruits and vegetables.

The Wholesale Price Index (WPI) based inflation stood at 2.47 per cent in March and 3.85 per cent in April last year. Inflation in food articles was at 0.87 per cent in April 2018, as against a deflation of 0.29 per cent in the preceding month.

In the second bi-monthly monetary policy for the current fiscal, the central bank revised upwards the retail inflation range to 4.8-4.9 per cent in the first half of 2018-19, and 4.7 per cent in the second half.

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