Shaken & stirred: Bond yields rise at fastest pace since 2008

India’s bond yields are rising at the fastest pace since the 2008 global financial crisis as investors bake in the likelihood of stubborn inflation and higher-than-budgeted federal borrowing, outcomes that could prompt the central bank to raise policy rates more quickly than initially anticipated.

So far this calendar year, yields on the benchmark 10-year bond have climbed 107 basis points despite relatively dovish central bank commentaries until the early-May unscheduled increase in policy rates.

A basis point is 0.01 percentage point.

“The inter-meeting hike served to un-anchor expectations with respect to tightening in this cycle,” said Suyash Choudhary, head – fixed income, Mutual Fund. “The spike in yields over such a short time shows that the central bank’s message was neither anticipated nor well received by the markets. This constitutes an unnecessarily large cost to the tightening process.”

Yields had climbed 128 basis points until early June in 2009, showed Bloomberg data compiled by ETIG, after the Lehman Brothers bankruptcy plunged the global economy into a sinkhole and marked the start to the greatest recession in world history since the 1929 crisis.

The benchmark bond yielded a tad higher at 7.52% Tuesday, the highest level in nearly three-and-a-half years. The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is scheduled to give its latest assessment on rates on Wednesday.

The five-year sovereign gauge, meanwhile, climbed 154 basis points since the beginning of the year, marking the sharpest rise in more than two decades. The gauge climbed 52 basis points in 2021.

“The markets expect intense rate hikes this year, which in turn is triggering a spurt in yields,” said Madan Sabnavis, chief economist,

. “The fear of additional sovereign borrowing, in anticipation of rising subsidy bills, is also weighing on the gsecs.”

Some debt market participants expect the repo rate at 6% in about a year, up from 4.40% now.

Experts also believe that yield differentials along the curve point to

increases in both rates and commodity prices.

“An unusual anomaly between shorter duration and long term yields reflects market expectations of sustained rate hikes amid a commodity super cycle,” Sabnavis said.

India’s total fertilizer subsidy is likely to reach a record Rs 2.15 lakh crore in FY23 amid soaring consumer prices. Moreover, North Block also reduced excise duty on motor fuels, triggering expectations of Rs 1 lakh crore in additional federal borrowing.

“With a strong pipeline for the central borrowing programme this fiscal and rising inflation, traders are apprehensive about the RBI’s yield management having limited options,” said Venkatakrishnan Srinivasan, founder at Rockfort Fincap, a Mumbai-based advisory firm.

For the first time since 2019, the Andhra Pradesh government sold two series of bonds offering yields more than 8%. Those securities maturing in the next 13-14 years yielded 8.03% and 8.07%, respectively, in the primary auction Tuesday.

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