India 10-year bond yield off highs; value buying seen

MUMBAI: The 10-year benchmark bond yield touched a four-and-a-half-month high of 9.12 per cent on Wednesday, but pared some of the gains due to value buying by investors to close at 9.04 per cent. In early trade, the yield had touched its highest since November 22, with the Reserve Bank not bailing out investors in managing yields, unlike earlier occasions.

At close, the yield was six basis points, or 0.65 per cent, higher than Monday’s close of 9.10 per cent. "In view of the Urjit Patel Committee report, the RBI is unlikely to resist rising yields with OMO ( open market operations) buybacks," said Nirakar Pradhan, chief investment officer at Future Generali India Life Insurance. "But insurers may find attractive buying opportunities. We are on the buying side currently."


The central bank buys or sells government bonds through OMOs. In January, a special RBI panel headed by deputy governor Urjit Patel had recommended that OMOs be used for managing liquidity.

"OMOs have to be detached from fiscal operations and instead linked solely to liquidity management. OMOs should not be used for managing yields on government securities," the committee had said, adding the RBI will manage liquidity and meet the demand for liquidity of the banking system using a mix of term repos, overnight repos, outright operations and the marginal standing facility, or the penal rate currently at 9 per cent.

Another 5-10 basis points rise in yields to reach a psychological level of 9.25 per cent cannot be ruled out, dealers said, expecting demand from overseas investors, too, as they may be lured by the level. However, uncertainty may continue until the new government announces its fiscal policy and borrowing programmes.

In the first government bond auction in FY15, there was a devolvement of bonds worth Rs 864 crore maturing in 2043. This means those bonds were not sold and primary dealers, who underwrite such securities ensuring their sales, had to take them on their books.

"The excess supply of bonds at the beginning of the year is pushing up yields," said Devendra Dash, a senior bond dealer at DCB Bank. "The devolvement suggests there was no sufficient demand for those government bonds at the cut-off yield (9.42 per cent) set by the RBI. The central bank was unwilling to give rates that market was asking for."

In April alone, RBI will conduct four government bond auctions to sell such securities worth Rs 68,000 crore. The government will borrow Rs 3.68-lakh crore up to September in 2014-15, 61.5 per cent of the total budgeted borrowing for the year.

"With excess SLR bonds, banks are in no hurry to buy fresh bonds unless there is a trading opportunity," said Ashutosh Khajuria, head-treasury at Federal Bank. Banks are mandated to hold 23 per cent of their total deposits in government bonds, which in market parlance, is called the statutory liquidity ratio, or SLR, obligation.