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    Bond yields hit 7-month low as market cheers RBI’s rate pause

    Synopsis

    Yield on the most liquid 10-year sovereign bond settled at 7.21 per cent as against 7.28 per cent at previous close. Bond prices and yields move inversely. A decline of one basis point on the 10-year bond yield corresponds to a rise in prices of roughly 7 paise.

    Sovereign bonds surge as market celebrates RBI’s unexpected rate pauseGetty Images
    India’s sovereign bonds surged Thursday, with the yield on the 10-year benchmark note plunging to a seven-month low intraday, after Mint Road unexpectedly split ranks with the central banks for Europe’s richer neighbourhoods and the US to leave interest rates unchanged at the latest policy review.

    One basis point is 0.01 percentage point.

    Yield on the most liquid 10-year sovereign bond settled at 7.21 per cent as against 7.28 per cent at previous close. Bond prices and yields move inversely. A decline of one basis point on the 10-year bond yield corresponds to a rise in prices of roughly 7 paise.

    Intraday, yield on the 10-year bond touched a low of 7.15 per cent - the lowest level since September 15, 2022 - as traders celebrated the central bank’s decision to hold off on further tightening. A fall in government bond yields bodes well for broader borrowing costs in the economy as sovereign debt products are the benchmarks for pricing a wide variety of credit instruments.

    On Thursday, Reserve Bank of India (RBI) Governor Shaktikanta Das said the six-member monetary policy committee (MPC) had unanimously voted to keep the repo rate unchanged at 6.50 per cent. Most market participants had expected the rate-setting panel to increase the policy rate by around a quarter percentage point as India’s consumer price inflation remains elevated. An ET poll had forecast a quarter percentage point increase

    The MPC has hiked the repo rate by 250 bps since May 2022. Das said that it was now necessary to evaluate the impact of those rate actions.

    The MPC also retained its current stance of withdrawal of accommodation. While Das said that the MPC would not hesitate to take further action in future meetings depending on the evolving inflation outlook, bond traders were largely of the view that further tightening would require persistently unpleasant inflation shocks.

    “MPC has taken a pause, kept the repo rates unchanged, against majority market view. We expect both GDP and inflation to be significantly below RBI’s year-end estimate of 6.5% and 5.2%, respectively,” said Sandeep Bagla, CEO of Trust AMC.

    “Interest rates are likely to soften considerably from current levels. Bonds will perform well this year generating capital gains over and above the coupon rates,” he said.

    In a sign of the market’s cheer with the RBI’s policy statement, Thursday’s primary government bond auction, the first sale of the current financial year, witnessed firm demand.

    The government sold three bonds worth a total of Rs 33,000 crore on Thursday, including a new five-year paper and a re-issuance of the 10-year bond. The cutoff yield for the 10-year bond was set at 7.21 per cent, 13 bps lower than the previous auction.

    Steeper Yield Curve

    With the bond market now breathing easy on the direction of monetary policy, short-term bonds, which are highly sensitive to interest rate expectations, notched up hefty gains. Yield on the 5-year bond declined as much as 14 basis points to 7.01 per cent. Traders now expect short-term bonds to outperform their longer-term counterparts, leading to a steeper sovereign bond yield curve.

    “The short-end looks more attractive, given that the supply is going to be limited there. In the long-end, the bigger concern is the supply which is going to come, especially at the extreme long-end - thirty-forty-year bonds,” said Shailendra Jhingan, MD, CEO at ICICI Securities Primary Dealership.

    “We would be more constructive at the five-year point compared to the long-end,” he said. Jhingan sees yield on the 10-year bond in a band of 7.15-7.30 per cent.

    Over the past year, the bond yield curve had flattened considerably, and even experienced sporadic inversions as yields on short-term bonds had climbed at a much more rapid pace than longer-term bond yields following aggressive rate hikes by the RBI. Under normal circumstances, investors demand higher yields from longer-term bonds in order to compensate for uncertainties on inflation over a larger time-frame.

    “I now expect bull steepening in the bond yield curve. Short-term bonds are finally looking more attractive after witnessing a lot of pain last year. I see the 3-year to five-year point at around 6.75-7.00 per cent so there is room for a rally there,” said PNB Gilts MD & CEO, Vikas Goel.

    Supply Concerns

    Even as the outlook on bonds improved considerably after the MPC’s statement, traders remained concerned about a large burden of bond supply set to hit the market in the current financial year. The Centre is scheduled to sell a record-high Rs 15.4 lakh crore worth of bonds on a gross basis in the current year.

    The bond sales, lined up in the first six months of the year, amount to Rs 8.8 lakh crore. The relentless pressure of bond supply is pushing up yield on the 10-year bond around the second quarter, traders said.

    Longer-term bonds are particularly seen facing upward pressure on their yields as a larger portion of the government borrowing is packed into such securities.

    “I see the 10-year bond yield in a band of 7.08-7.28 per cent in coming months. We would start testing the 7.28 per cent level in the second quarter as the supply pressure builds up and the prevailing euphoria surrounding rates recedes. I am hopeful of the RBI starting OMOs (open market operations) from October onward. Bond auctions would see volatility by then,” Goel said.




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    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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