Bond watch. Sovereign bond yields continue to harden on rising crude price, treasury yields

There seems to be no respite for G-sec yields even as crude prices and the US treasury yields continue to rise. The benchmark yield closed at 6.36 per cent, after having nudged the 6.4 per cent levels where a lot of buying support emerged.

After having closed below the $85-dollar mark, Brent crude has continued to persist above this level this week, even touching the $86-dollar level. On the other hand, the 10-year US treasury yield hovered very close to the 1.7 per cent mark compared to last week’s 1.57 per cent level.

On the domestic front, the Reserve Bank of India (RBI) released the monetary policy minutes. Market participants say, the minutes were fairly balanced and did not present any element of surprise.

However, with the benchmark yield hovering close to the 6.4 per cent mark, expectations were building up in the market that the Central bank would spring into action and announce some sort of bond buying that would help calm the yields.

The yields even saw some softening on Thursday on this account, having cooled three basis points to 6.33 per cent. However, since there was no announcement, the benchmark yield edged higher and closed at 6.36 per cent on Friday.

Crucial support

Dealers say that the 6.4 per cent level is crucial and despite the buying support seen in recent times, things could go south if oil prices continue to bother the market.

Siddharth Shah, Head of Treasury at STCI Primary Dealer opines that high crude prices and US treasury yields are still putting pressure on yields and these two variables are the cause for the bearishness in the domestic bond market.

“Many investors have been keenly waiting for the benchmark yield to hit the 6.4 per cent and we saw buying support coming in at these levels this week. When the yield was hovering close to this level, there was strong anticipation in the market that there would be some sort of action from the RBI in the form of bond buying, either through OMOs or through twist. Since nothing materialised, we saw the yields harden on Friday.

As far as the MPC minutes are concerned, there was no surprise. I expect the benchmark yield to find support at around 6.4 per cent but if oil prices continue their upward momentum, we could possibly see 6.5 per cent levels around which there would be expectation of Central bank support coming in by way of announcement of OT etc,” he said.