Benchmark bond yield at 7% after 14 months

The yield on the 10-year government security (G-Sec) closed over seven per cent on Tuesday, given concerns regarding rising inflation, geopolitical instability, rising oil prices, fiscal policy issues and depreciation of the rupee. The previous time the 10-year bond closed above seven per cent was on September 8, 2016. 

The 6.79 per cent G-Sec maturing in 2027 opened at 6.98 per cent. It rose to 7.05 per cent at close from 6.97 per cent on Monday, according to data from the Clearing Corporation of India Ltd. (CCIL). The yield for the 10-year bond has risen considerably over the past one month (since October 10) by almost 31 basis points.

G-Secs weakened due to heavy selling pressure from banks and corporates. Overnight call money rates also turned lower due to a lack of demand from the borrowing banks, amid a comfortable liquidity situation in the banking system. 

“There is trend reversal of easing rate cycle. The yields will remain stable for some time and move up when the demand for credit rises on sustainable basis. Inflation has upside bias due to rise in crude oil prices and depreciation of rupee,” Rupa Rege-Nitsure, group chief economist at L&T Finance Holdings, said.

While global factors in Saudi Arabia, China and other places have certainly contributed to the general trend being witnessed in bond yields, on the domestic front, issues concerning inflation and fiscal policy spurred the rise of the 10-year bond yield. Consumer Price Index (CPI)-based inflation stood at 3.58 per cent for October compared to 3.28 per cent in September. Wholesale Price Index (WPI)-based figures, released on Tuesday, also revealed inflation was on the uptick. WPI-based inflation rose to 3.59 per cent in October, from 2.6 per cent in September 2017.  

CCIL data shows that despite a 28 per cent decrease in the trade volumes on Monday (November 13) over last Friday, the activity surged in government paper (10-year benchmark) to 3,679 trades worth Rs 39,950 crore.

When asked why the yield was rising in comparison to 2013, when the 10-year bond yield touched 9.13 per cent, Ajay Manglunia, executive vice-president at Edelweiss Financial Services, said, “Oil was at a very high level (then), at $100 and above, and inflation was high, and there was a lot of fiscal deficit. The government (now) has been strong on curtailing the fiscal deficit. It has been doing cautionary borrowing.” This implies that in 2013 there were far more fundamental issues with the economy that caused the yields to rise to 9.132 per cent; inflation and the government’s fiscal spending has been constrained in recent years, despite the recent data on retail and wholesale inflation, and the fiscal hurt that will take place due to changes made by the Goods and Services Tax (GST) Council. 

There are still concerns, Manglunia said. “The Government of India is pursuing aggressive targets, and needs money to pump into the banks; both affect the fiscal deficit,” he said. The concerns arise from the fact that the government may have already spent more than 90 per cent of the entire year’s Budget by now, and would need to borrow further to continue achieving its goals.  

What happens if yields rise?

As yields rise, the price of the bond falls and, therefore, the holder of the security would have to incur a loss. Similarly, when the holders of a G-Sec are large institutions such as commercial banks, non-banking financial companies (NBFCs), insurance companies, mutual funds, provident funds, corporations, cooperative banks and even the Reserve Bank of India (RBI), all of these institutions will incur a loss when the yield of a bond rises considerably.  

Harihar Krishnamoorthy, head of treasury at FirstRand Bank, said most banks have already achieved their Tier-2 capital requirements, and now that the bank recapitalisation policy has been announced there isn’t much of an impact the yield would have; especially on public sector banks. 

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