Bubble buzz in bond street
The bond market is witnessing a curious rally, but many are willing to call it a bubble.
By TNN |
MUMBAI: The bond market is witnessing a curious rally, but many are willing to call it a bubble. A pause in rate hike by the Fed and the Reserve Bank of India’s action of tinkering with the size and tenor of securities auctioned boosted the sentiments of local investors and caused a rally in the bond markets. However, sections in the market say bond yields may not dip further.
As an outcome of the rally, bond prices rose by 200 paise over the past fortnight. The yield on the benchmark 7.59% ’16 paper has dropped to 8.02% level on Thursday from 8.30% level seen in the beginning of August. Partha Mukherjee, head-treasury, UTI Bank, said: “The rally is a reflection of the underlying sentiments and there is no question of a bubble. The benchmark yield is unlikely to slip below the 8% mark as the central government auctions slated for the coming months will hold the yields from falling.”
The RBI, in the past, cancelled the auction of a central government bond and on another occasion, lowered the tenor of the security that was to be auctioned off. This, coupled with the falling crude prices and the pause in the Fed rate hike, created expectations that the central bank may go slow in hiking domestic rates.
Nitin Jain, head-fixed income, ICICI Securities, said: “The interest rate environment across the globe is undergoing a change. The recent rally has been fuelled more by interest rate traders than banks in the past couple of weeks. However, the question of a bubble does not arise because there is no single player accumulating large positions.”
Treasury officials explained that domestic triggers such as inflation and the rehabilitation of flood-hit states, which is likely to exert heavy pressure on the government finances, may even prevent prices from rising further. Said SR Kamath, general manager, Securities Trading Corporation of India (STCI): “The latest US data suggests that US inflation is under control. This implies that the Fed could extend its current pause on rate hike decisions. The Centre would experience pressure on its spending, especially in the states hit by floods. Plus, the flow of revenue from these states will also be impacted for the next two quarters.”
Market players foresee a smooth sale of securities at the auction by the central government scheduled for Friday. Even with the when-issued platform being opened for primary dealers, much of the trade executed has been only in the shorter-tenor paper, said treasury officials.
As an outcome of the rally, bond prices rose by 200 paise over the past fortnight. The yield on the benchmark 7.59% ’16 paper has dropped to 8.02% level on Thursday from 8.30% level seen in the beginning of August. Partha Mukherjee, head-treasury, UTI Bank, said: “The rally is a reflection of the underlying sentiments and there is no question of a bubble. The benchmark yield is unlikely to slip below the 8% mark as the central government auctions slated for the coming months will hold the yields from falling.”
The RBI, in the past, cancelled the auction of a central government bond and on another occasion, lowered the tenor of the security that was to be auctioned off. This, coupled with the falling crude prices and the pause in the Fed rate hike, created expectations that the central bank may go slow in hiking domestic rates.
Nitin Jain, head-fixed income, ICICI Securities, said: “The interest rate environment across the globe is undergoing a change. The recent rally has been fuelled more by interest rate traders than banks in the past couple of weeks. However, the question of a bubble does not arise because there is no single player accumulating large positions.”
Treasury officials explained that domestic triggers such as inflation and the rehabilitation of flood-hit states, which is likely to exert heavy pressure on the government finances, may even prevent prices from rising further. Said SR Kamath, general manager, Securities Trading Corporation of India (STCI): “The latest US data suggests that US inflation is under control. This implies that the Fed could extend its current pause on rate hike decisions. The Centre would experience pressure on its spending, especially in the states hit by floods. Plus, the flow of revenue from these states will also be impacted for the next two quarters.”
Market players foresee a smooth sale of securities at the auction by the central government scheduled for Friday. Even with the when-issued platform being opened for primary dealers, much of the trade executed has been only in the shorter-tenor paper, said treasury officials.
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