Worries over sovereign bonds push yields up


MUMBAI: Uncertainty over the sale of sovereign bonds overseas for the first time is causing yields to harden unexpectedly in India, where most market participants still believe rates would remain benign to help underpin economic growth.

“An element of uncertainty over sovereign bond sale overseas has spooked traders,” said Vijay Sharma, head of fixed-income at PNB Gilts, a Delhi-based bond house. “This, combined with fewer likely rate cuts, is pushing up yields and causing bond investors to recalibrate their positions.”

The benchmark gauge jumped 22 basis points (bps) in the past seven working days amid moderation in interest rate sentiment. A basis point is 0.01 percentage point.

It closed at 6.53 per cent Friday versus 6.31 per cent on July 17. Bond yields rise when prices fall.

High market yields could well be an obstacle in lowering borrowing costs when the Reserve Bank of India (RBI) is slashing the policy rate in a cycle of easing that began last year.

“Nonetheless, a rising yield trajectory would again nullify any efforts toward rate cut transmissions to the real sector lendings,” said Sharma.

More than a week ago, RBI governor Shaktikanta Das had told ET that the Monetary Policy Committee had changed its stance to “accommodative and already cut policy rates by 75 basis points.”

Market participants now expect a quarter point cut instead of a further 50 bps reduction in rates. The government proposed raising $10 billion in sovereign paper sales overseas for the first time. This is expected to cut domestic issuances, a move that will increase demand, sending yields lower.

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But investors now have their doubts. Many dissenting voices — oth from experts and politicians — have emerged since the proposal was made. The exit of Finance and Economic Affairs Secretary Subhash Chandra Garg, despite his claims to the contrary, was initially linked in part to the proposal.

“The series of events has left bond traders sceptical,” said Naveen Singh, head of trading at ICICI Securities PD. “Unless there is enough evidence of more rate cuts in the policy, the benchmark yield is unlikely to go down even with a rate reduction in August. Also, traders may not take fresh bets until there is better visibility on overseas sovereign bond sales.”

Worries Over Sovereign Bonds

Bond traders expect benchmark yields to be range bound – 6.40-6.60 per cent.

The Monetary Policy Committee at the Reserve Bank of India will announce its bi-monthly policy on August 7.

“RBI’s narrative will be as important as any rate cut in the forthcoming policy,” Singh said.

Gsec trading volumes have more than halved between July 17 and July 26.

Short-term traders exited positions booking profits, and long-term investors bought with the intention to hold the instruments until maturities.

“Yields had come down sharply, creating opportunities for profit booking,” said Sandeep Bagla from Trust Capital.

“In the absence of clarity on sovereign bond issue and transfer of RBI’s surplus capital, the market is now turning apprehensive of additional paper supplies,” Bagla added.

The Bimal Jalan panel, set up to review the economic capital framework of the central bank, chose to recommend the transfer of surplus reserves to the government in a staggered manner over a three-to-five year period.

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