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The stress on the bond markets was clearly visible on Friday as the first auction of FY15 saw a small devolvement of R864 crore on primary dealers. Bonds worth R16,000 crore were auctioned by the Reserve Bank of India (RBI).
The yield on the benchmark 10-year government bond, which had streaked past 9% on Thursday, hit a new multi-month high ending at 9.06%, a level last seen only in November 2013. Market participants expect the 10-year yield to harden more to a range of 9.2-9.4%.
“Long-term yields are reflecting the high supply of paper, the market feels there may not be enough support through OMOs (open market operations),” Jayesh Mehta, MD and head, fixed income at Bank of America-Merrill Lynch, said.
A devolvement not only indicates tepid demand for bonds but also the RBI’s intolerance towards higher yields, dealers pointed out. The massive bond supply scheduled during April-September and the uncertainty over the government’s borrowing programme, owing to general election, is likely to drive up bond yields by a further 25 basis points in the coming months, they feel. “There are enough indicators that show bond yields are going to harden more. I think the 10-year could go to 9.25-9.50%,” said Ajay Marwaha, head of trading at HDFC Bank.
The government is scheduled to borrow Rs 3.6 lakh crore from the bond market during April-September. This translates to a weekly bond supply of at least Rs 16,000 crore. Moreover, dealers fear that this indicated borrowing number could increase further once a new government is elected in May after the electoral polls.
Adding to the supply stress is the RBI’s move to curtail cheaper access to liquidity by reducing banks’ borrowings through the repo tender to 0.25% of deposits from 0.50% earlier. “With the amount of money being made available and the repo rate coming down steadily over a period of time, the certainty that is there in the market that the call money rate will trade close to the repo rate, has gone down a bit,” said Neeraj Gambhir, MD and co-head of fixed income at Nomura Securities.
Funds from the daily repo tender are available at 8% while term repos are priced variably according to tenure and demand at the auction. On Friday, banks borrowed Rs 60,000 crore from 13-day term repo at a price of 8.22%. The increased focus on term repos has also dashed hopes that the RBI may use bond