Bond yields off highs; value buying kicks in

Bond yields eased from near 18-month highs on Monday as the market consolidated after a sharp spike following an unscheduled rate hike by the central bank on Friday with concerns over next fiscal’s borrowing weighing.

The yield on the 10-year benchmark 6.35%, 2020 bond ended at 7.85% after rising to 8.03% in early trade, its highest since October 8, 2008. It had ended at 7.83% on Friday. Volumes were a heavy Rs 6630 crore ($1.5 billion) on the central bank’s trading platform. “The monetary policy will have some impact on bond yields but the borrowing calendar will have more impact,” said Mohan Shenoi, head of treasury at Kotak Mahindra Bank. “The policy rates increase will have an impact on the shorter-end of the yield curve but the real impact on the rest of the curve — 3 years and above — will be dependent on the borrowing programme,” he added.

RBI, citing intensifying inflationary pressures and a steady economic recovery, caught investors offguard with a 25 bps tightening late on Friday, after local markets had closed. Analysts and investors had ex-pected a rise of 50 bps points but not until the central bank’s policy review on April 20. Many now see another 25 bps hike at that meet-ing next month.

“Short-end will move up as the policy rates move up and the yield curve will be flatter and flatter as we go along. The spread between the 1-10 year bond will narrow by 50-60 bps over the next year,” Shenoi said. The spread between 1- and 10-year government bonds has been wid-ening since late April 2009 and peaked at a record 326 basis points on July 24.