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MSS issuances lift bond yields
Bond yields have risen by 10 basis points in the last three weeks owing to government auctions and increased issuance of market stabilisation scheme.
Updated : Sep 15, 2017, 01:28 AM IST
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10-yr paper yields have risen by 10 bps in 3 weeks
MUMBAI: Bond yields have risen by 10 basis points in the last three weeks owing to government auctions and increased issuance of market stabilisation scheme (MSS) bonds by the Reserve Bank of India.
On Tuesday, the yield on the benchmark paper 7.99%, due July 2017 touched a month-high of 7.93% in intra-day trade before closing at 7.92%.
Dealers continue to remain bearish on the bond market. RVS Sridhar, vice-president, treasury with Axis Bank, says, “The supply is severe this week. If this continues, we fear that liquidity will dry up.”
“Increasing the cap on MSS securities has added fuel to fire. We expect bond yields to hover around 7.93% levels in the short term,” he added.
The central bank has resorted to MSS auctions to drain out surplus cash that it had pumped into the banking system to curb appreciation in the rupee. It has issued a total of Rs 18,000 crore of MSS bonds since September 26.
Last week the RBI increased the cap on such bonds issuances from Rs 1,50,000 to Rs 2,00,000 crore. MSS outstanding as on October 5 was Rs 1,44,940 crore, the RBI said.
The rupee stood at a 9-and-a-half year high of 39.43 against dollar on Monday. With the cut in interest rates by the US Fed last month, there has been a surge in foreign inflows into the country.
There are also talks of a hike in the cash reserve ratio.
“Fears of an increase in CRR is also keeping bond yields at higher levels,” says Manoj Swain, head of fixed income, Standard Chartered Bank.
He expects the rising rupee to keep the bond market under pressure. “We expect bond yields to hover around 7.90-7.95% till the monetary policy scheduled this month end”.
According to Clearing Corporation of India (CCIL), bond market volumes have dipped from Rs 3,400-3,500 crore last week to Rs 1,200-1,300 on Tuesday.
“While bond supplies have increased, demand has dampened. There are expectations of a hardening of interest rates after the monetary policy,” said Golak C Nath, vice president, CCIL.
