Uncertainty among investors: Yield growth on Fed stance, tightening oil prices

Dealers expect that each auction will additionally burden the yields due to cancellations and switching to primary dealers.

Yields on benchmark bonds rose more than 9 basis points in the week ending Jan. 7 after a sharp rise in U.S. Treasury yields, hawk minutes by the U.S. Federal Open Market Committee and a sharp rise in global crude oil prices. In addition, there was disappointment among traders after governments increased their bond borrowing in the January-March quarter and the absence of the announcement of a new reference bond by the Reserve Bank of India (RBI).

The yield on the reference bond of 6.10% -2031, which was traded at 6.4537% last week, exceeded the psychological mark of 6.50% and traded above 6.54% by the middle of this week. It finished at 6.5423% on Friday.

“Currently, Indian bond yields are more affected by external factors such as U.S. Treasury yields and rising crude oil prices. As things calm on a global scale, we can see that markets are shifting their focus to domestic inflation and fiscal deficit. At the current level of return, it seems that most of the negative has already been included in the price “, said Pankaj Pathak, fund manager, fixed income in Quantum Asset Management.

Yields rose during the week after a sharp rise in ten-year U.S. Treasury benchmarks after FOMC records signaled an earlier-than-expected tightening of monetary support and an expected rate hike in 2022. 20 basis points from last week and ended at 1.73% on Thursday. Growing yields on U.S. securities narrow the difference in interest rates with yields on debt in emerging markets, making the latter less attractive to foreign investors.

Brent crude prices rose after the unrest in Kazakhstan and the deteriorating political situation in Libya, which affected supplies. By the end of the Indian market, Brent oil prices were trading at $ 82.78 a barrel, an increase of 0.96%.

In addition, there was uncertainty among investors after government borrowing through bonds rose more than expected in January-March. Last week, RBI announced higher market borrowing of 3.09 million kroner for countries for the January-March quarter. “Yield should continue to be under increasing pressure as markets take care of supply, including SDL, as we enter the budget session,” said Sandeep Yadav, director of fixed income, DSP Investment Managers.

Market participants expect RBI to announce a new benchmark next week as the current 10-year benchmark bond has reached an outstanding amount of 1.5 million rupees. Dealers expect that each auction will additionally burden the yields due to cancellations and switching to primary dealers.

“The cancellation of the auction last week shows the RBI’s uneasiness due to the sharp rise in yields. Therefore, it is very likely that RBI will publish a new 10-year benchmark to show better headline figures on the reference yield, ”Yadav said.

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