Bond yields rise nearly six basis points to 24-month high of 6.52% – World Affairs SRS

Bond yields rise nearly six basis points to 24-month high of 6.52%

– World Affairs SRS

The yield on the benchmark 10-year Government of India bond rose nearly 6 basis points (bps) to a 24-month high of 6.52 per cent on Tuesday. This was the biggest one-day rise in bond yields in the past four months as bond investors sought higher returns (or interest rates) given India’s rising fiscal deficit and high inflation. The market closed on Monday with a return of about 6.46 percent.

A bps is one-hundredth of a percentage.

Dhananjay Sinha, managing director and chief strategist, said, “Given the rise in bank credit-to-deposit ratio, high inflation and rise in bond yields in the US, bond yields in India have been under upward pressure for several months.” , JM Institutional Equities.

Gopal Tripathi, chairman and head-treasury and capital markets, Jana Small Finance Bank, said the incident would not come as a surprise to anyone. The yield on the benchmark has been rising a few basis points over the past few days, judging by inflation concerns and a tightening trend in the global market. Monday’s rally in the US Treasury yield added to the momentum.

Overnight on January 3, 2021, bond yields on 10-year US government bonds rose 8.3 per cent, or 12.5 bps, to a one-month high of around 1.64 per cent. The Treasury yield in the US has more than tripled from its record low of 0.52 per cent in July 2020. This has put upward pressure on bond yields around the world.

However, the Reserve Bank of India (RBI) has been wary of higher bond yields, as they have negative consequences on central and state government fiscal deficit financing. Higher returns are also likely to translate into higher interest rates on corporate lending and retail loans which may hinder RBI’s effort to stimulate India’s economic growth through lower interest rates.

This has resulted in a tug of war between the central bank and the bond market. Last Friday, the RBI had canceled the auction of government bonds worth Rs 17,000 crore. Analysts attribute this to the bids (or returns) from bond investors that central banks were willing to pay. A week earlier, on December 25, the auction of bonds by RBI was shifted to primary dealers as investors were demanding higher returns.

Bond yields in the secondary market are calculated based on bond prices. Yields fall when bond prices rise and vice versa. In other words, investors sell their bond holdings when they are not satisfied with the current yield and buy bonds when they are ready to accept a lower yield.

With the latest move, bond yields are up around 62 bps in the past one year and around 76 bps from the record low of 5.76 per cent made in early July 2020.

This has raised the possibility of an increase in the lending rate in the economy as the yield on 10-year government bonds acts as the benchmark interest in the economy.

“It does increase the cost of money, but as long as rates don’t move beyond digestible levels (around current levels), many feathers won’t shed. I don’t think the government and RBI will be worried about this level.”

ICRA Chief Economist Aditi Nayar said the rise in yields in the domestic market was due to the rise in US newspapers. If Indian government securities are not included in the global index, the 10-year benchmark yield could rise to 6.7 per cent. Besides, another factor that could raise the yield would be the inability to meet the disinvestment target by the end of February. This may prompt the central government to borrow more in March this year.

Investors choose hope over fear
Benchmark indices extended their gains during the second session of the new year as investors watched rising COVID cases and continued to bet on India’s economic recovery.
The Sensex closed Tuesday’s session at 59,856, up 673 points or 1.1 per cent. The rally in the index was led by Reliance, TCS and finance majors.

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