Bond investors factor in rate cut, yields head lower

MUMBAI: The bond market is already showing signs of lower rates with falling yields even though RBI governor Raghuram Rajan isn't cutting rates yet. And if the trend persists, it is likely to reduce corporate borrowing costs.

The 10-year benchmark bond yield on Monday slipped to about 15-month low as investors rushed to lap up sovereign securities, expecting further dips in yields on the back of improved macro parameters. It closed at 8.18% compared with 8.21% last Friday. For the past one month, it dipped 28 basis points, or more than 3%. Bond yields move in opposite direction to prices.

“Bond yields are anticipating RBI to start cutting rates in 2015, and are pricing in the expected rate cuts,” said Badrish Kulhalli, fund manager-fixed income, HDFC Life Insurance. “Markets are drawing greater comfort from the fall in inflation and easing crude oil prices, which will make the fall in inflation more sustainable.”

Global developments like the expansion of Bank of Japan’s easy money policy and the expectation that the US Fed will maintain current low interest rates for a considerable time are positives for emerging markets like India where investment risk is perceived to be higher.

Last month, BoJ decided to increase government bond purchases to 80 trillion yen ($725 billion) annually in a bid to revive waning growth. Moreover, the European Central Bank will also attempt to revive the struggling euro zone economy through a similar bond purchase programme of almost 1 trillion euro, or $1.24 trillion.

“All these factors have served to increase the confidence of investors that it is only a matter of time before RBI eases its stance on monetary policy,” said Kulhalli. The central bank will announce its next bi-monthly policy on December 2.

The demand for bond buying also came from the bond redemptions and the RBI’s latest issuances of cash management bills – short-term debt securities with less than 91-days maturities.

“We have seen some fresh buying interest due to a combination of factors: issuance of cash management bills and some replacement buying for upcoming redemptions,” said Arun Srinivasan, senior vice-president, investments, ICICI Prudential Life Insurance. CMBs were not scheduled for issuances.

CMB issuances signal that the central bank may not sell more government bonds through open market operations leading to less supply of securities, which in turn, would increase demand. Securities coming up for maturities may warrant fresh repurchases by institutions.

The central bank on Monday sold 42-day government cash management bills for Rs 10,000 crore while government bonds worth Rs 5,042.46 crore will mature on Wednesday. Another series of government securities have already been redeemed on November 3 for Rs 32,996 crore.

Corporates which raise funds by selling bonds priced in sync with the benchmark government bond may now have to pay less to investors.