10-yr bond yields hit treasury math; moves up about 30 bps since rate pause

The yield on the 10-year government bond has moved up about 30 basis points (bps) since the December 5 rate pause by the Reserve Bank of India (RBI) and, like the central bank, the bond market is also waiting for the Union Budget in February to get more clarity on numbers. 

The bond yield closed at 6.80 per cent on Monday, as against 6.47 per cent on December 4. 

“The market is expecting more clarity in the upcoming Budget to gauge the fiscal position of the government," said Hemal Doshi, vice-president — treasury at SBI DFHI, a primary dealer. 

Till further cues, the 10-year bond yields should remain range-bound within 6.75-6.85 per cent, market participants, including Doshi, said. 

B Prasanna, head of global markets and proprietary trading group at ICICI Bank, said the yield movement in the 10-year bonds had been enough for now and it should consolidate around the present level. 

However, that would also mean that the 135-bp rate cut since February, which resulted in 137-bp transmission in money market rates and about 87-bp transmission in the 10-year bond yields, has reversed by at least 30 bps. 

An elevated yield level also makes borrowing by the government costly, as it would likely hit the market with extra borrowing, unless it cuts its expenditure drastically to balance out low revenue collection from taxes. 

At a time of growth slowdown, when the central bank and the government want banks to pass on rates, banks will also have no obligation to cut their rates if the underlying market instrument moves up and small savings certificates continue to offer high interest rates. 

“There will be no transmission in lending rate as banks are unlikely to cut deposit rates any further,” said a senior banker, requesting anonymity. The rise in yields would also be a bit uncomfortable for bank treasuries as they were betting on a handsome return on their bond portfolio. As yields rise, prices of bonds fall. However, that doesn’t mean that banks would be incurring losses.

“In a shorter tenure, banks would still be ‘in the money’, whereas for a longer tenure, banks would be somewhat ‘out of money’.

On a net-net basis, this year has been good for the bank treasuries and even as yields have move a little bit, the 10-year is still around the September level,” said the banker. RBI Governor Shaktikanta Das had said in the December 5 monetary policy that once banks move their entire portfolio to external benchmark linked one, then there would be greater transmission, from the meager 47 basis points drop in weighted average lending rate of banks. However, a section of the market says lending rates of banks had very little relation left with the bond yields, and hence transmission would still happen as long as the RBI kept its policy repo rate low.

“Already most of the banks have linked their loan rates to the repo rate. Hence, transmission should not be impacted due to a rise in G-sec yields,” said Devendra Dash, head of asset liability management of AU Small Finance Bank.

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