Bond eases on reports govt, RBI mull steps to soften yields

The yield on benchmark bonds fell over 6 basis points on Monday on reports that the government and the Reserve Bank of India (RBI) are discussing steps to cool bond yields which have risen sharply, dealers said. The 10-year 6.54%-2032 benchmark bond yield ended at 7.1525%, compared with the 7.2148% close in the previous trading session.

Market participants said there was short covering by traders. The absence of an announcement of weekly state development loan auctions by the central bank also improved the sentiment.

There were reports that the central bank and the government are working to bring bond yields down through various instruments such as OMOs and higher HTM limits. That led bond yields to fall,” said Mahendra Kumar Jajoo, CIO – fixed income, Mirae Asset Investment Managers.

The central bank has various options to infuse liquidity into the system and protect banks’ portfolios. It can use open market operations (OMO) and increase the limit of held-to-maturity for banks’ bond portfolios. Dealers said states may not come to the market immediately as the Budget has provided a Rs 1 lakh-crore interest-free loan.

Last week, the benchmark yield surged to a three-year high after the inflation print jumped to nearly 7%, much higher than what economists estimated. Bond yields were also influenced by the devolvement in the weekly bond auction and higher borrowing by the central government in the first half of the current financial year.

Dealers expect if the central bank announces an OMO or any other tool to rein in the yield, then the sentiment of traders will improve, resulting in a decline in the yield in coming days.