Bond yields off day's high on lower US Treasury yield

Bond yields retreated from the day’s high to end marginally up on Monday, tracking lower US treasury yields in Asian trade amid uncertain global equities outlook.

However, underlying sentiment remained negative on concerns that payments towards the third-generation (3G) mobile spectrum auction could cause a cash crunch in the banking system and prevent any sharp fall in the yields.

“In the first half of the day, there were concerns on liquidity. But in the second half, there were statements that liquidity will be managed and also US treasury rates were lower,” said Ananth Narayan G, head of rates and credit for south Asia at Standard Chartered Bank. The yield on the 10-year benchmark bond ended at 7.40%, higher than its 7.38% close last Friday. It had fallen to 7.32%, its lowest since December 1, 2009, in the previous session.

The 2020 bond moved in a range of 7.38-7.44% during the day. Volume was a heavy Rs 16,955 crore ($3.6 billion) compared with Friday’s Rs 16,455 crore on the central bank’s trading platform. Ten-year treasury yield was at 3.212%, down roughly 2 basis points from late US trading last Friday.

Expectations of cancellation of some part of government borrowing in June were doused by one of the deputy governors of the central bank. The benchmark 10-year bond yield rose by 1 basis points on a knee-jerk reaction to the news. RBI deputy governor KC Chakrabarty said it is difficult for India’s borrowing during April to September to come down, but there is a 50:50 possibility for the October-March borrowing to be reduced.


“Market will remain negative till next week because of concerns on tight liquidity. Banks are already building more products this week so that next week lesser products can be maintained,” said a dealer at a foreign bank. Banks parked only Rs 4,540 crore at the central bank’s reverse repo auction compared with Rs 38,205 crore last Friday.

The level indicated that banks preferred to use their surplus cash in maintaining higher-than-mandated cash reserves with the central bank, so that they can keep the minimum requirement next week when tight cash conditions are expected. On Tuesday, bond yields are seen rising more on cash crunch worries and profit booking, dealers said.

The benchmark 2020 bond is seen in 7.40-7.45% on Tuesday. “I think yields should consolidate. I don’t expect auction cancellation now and the supply factor will keep yields tight. But there will be buying at every uptick in yields,” Ananth Narayan said. The benchmark five-year interest rate swap ended at 6.36/39%, from the previous close of 6.36/38%.

In interest rate futures on the National Stock Exchange, the June contract implied a yield of 8.1902%, while the September contract was not traded.