At 7%, bond yield puts market on edge

Despite efforts by the RBI to keep them down, India’s benchmark bond yields on Thursday yet again spiked above the psychological 7 per cent mark. Stock market traders are keenly watching bond yields to take any further call.

On Monday the RBI cancelled its open market operations (OMO) of selling bonds worth ₹10,000 crore after yields touched a 14-month high of 7.06 per cent last week post Moody’s upgrade of the country’s sovereign credit rating. The yields crashed to 6.88 per cent after the RBI move but the euphoria was short-lived. By Thursday, the bond yield rose 2.03 per cent in just three trading sessions to touch a high of 7.02 per cent.

“Moody’s upgrade along with RBI’s measure to curb bond market supply were supposed to halt the rise in India’s benchmark bond yield, but that does not seem to be playing out as per the script,” said the research head of a leading foreign brokerage house.

FPIs may turn aggressive While foreign portfolio investors have been consistent sellers in the equity markets for over a couple of months now, they may be turning sellers in bond markets too. In November so far, FPIs have sold bonds worth around ₹800 crore. This selling could have been to the tune of around ₹3,000 crore had they not purchased bonds worth around ₹2,000 crore on Monday and Tuesday after the RBI scrapped its bond sale, dealers in the bond market said. In fact, FPI selling in the bond market in November could be the first month of outflows since January this year if the trend continued, analysts said.

On Thursday, the rupee traded at its key support level of 64.60 against Wednesday’s closing price of 6.74 supported by the dollar’s fall globally. At around 6 pm, the dollar, against a basket of six major global currencies against which it is benchmarked, fell 0.12 per cent to trade at 93.04.

US Fed factor

“Globally, bond markets have started factoring in the US Federal Reserve’s hike in the key interest rate in December and coming of inflation with sharp spike in crude prices,” the research head said.

There is a contrary view to this thinking.

“A 7 per cent bond yield in India could be the new normal considering that the US Fed is set to hike interest rates in December and that could not worry the equity markets,” said Gautam Bahal, CEO, Mauryan Capital, Alternate Investment Fund. “Bond yields will be closely watched and only if they spike above 7.2 or 7.3 per cent, it could start worrying equity investors.”

The rise in India bond yield is in line with the sudden spike in global benchmark bond yields in the past few weeks following a sell-off in US high-yield or junk bond market.

Rising oil prices, government’s PSU re-capitalisation and likely shortfall in GST collections are among key factors that have shaken the domestic bond markets while stocks are still in euphoria.

Finer details of the bank re-cap plan are not known but bond markets are expecting more supply in the coming years as banks will sell re-cap bonds in the open market.