The yield on the benchmark 10-year government bond rose to a two-month high on Monday, tracking a rise in US Treasury yields. The benchmark yield settled at 7.15 per cent, the highest since January 30, against 7.12 per cent on Friday.
In April, the yield on the 10-year benchmark government bond has hardened by 10 basis points (bps).
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“Yields rose because of the rise in US yields. Rates have been rising globally, so India can't be an outlier. It (benchmark yield) should find some footing around these levels, not rise too much, but it is difficult to say as we have the Consumer Price Index (CPI) data lined up,” said Naveen Singh, vice president of ICICI Securities Primary Dealership.
The newly auctioned 10-year government bond, introduced for the first time on Friday, swiftly emerged as the second most traded bond, after the benchmark bond. Market participants said that it might ascend to benchmark status after its second issuance. The government auctioned Rs 20,000 crore worth of the bond, and the coupon was set at 7.10 per cent.
The current benchmark bond took more than two months to become the most traded bond and dethrone its predecessor. The outstanding amount on the existing 10-year paper has reached Rs 2 trillion.
“The issuance amount was Rs 20,000 crore for the bond (the new 10-year bond); it should become the benchmark by the second issuance as the issuance amount is large,” said Vikas Goel, managing director and chief executive officer of PNB Gilts. “It is also because the market sentiment is negative. When the sentiment is positive, people hold on, but in the current scenario, people rush,” he added.
The rise in overnight interest swap (OIS) rates further aided the bond yield on Monday. The 5-year OIS rate rose by 10 bps, whereas the 1-year OIS rate rose by 5 bps on Monday.
“The OIS curve is steepening. In the negative rate scenario, the curve tends to steepen,” said Singh.
US Treasury yields surged amid growing speculation that the US Federal Reserve may postpone rate cuts this year. Stronger than expected manufacturing and employment data showed that the US economy remains resilient, thereby lowering the chances of rate cuts by the US rate-setting panel in June. According to the CME’s FedWatch Tool, the probability of a rate cut in June fell to 48 per cent, from 58 per cent in the previous week.
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The yield on the 10-year US Treasury note rose to 4.45 per cent by the end of trading hours on Monday, against 4.34 per cent on Friday.
Market participants now eye the US Consumer Price Index (CPI), due later in the week, for further clarity on the rate trajectory.
“The rate cut is being pushed further and further because the data is not supportive. The US yield is seen touching 4.50 per cent, so there is selling in our market,” said a dealer at a state-owned bank. “There is support at 7.15 per cent (yield on the benchmark bond) but it may go up to 7.17 per cent-7.18 per cent,” he added.
On the domestic front, inflation is seen moderating in the current financial year. The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) lowered its CPI inflation forecast for the first, second, and the fourth quarter of the current financial year. Notably, inflation in the second quarter is projected below 4 per cent, at 3.8 per cent. The RBI projected inflation in the first quarter (April-June) at 4.9 per cent, against the earlier projection of 5 per cent. Similarly, the fourth quarter (January-March) is estimated at 4.5 per cent, against the earlier 4.7 per cent forecast.