The ongoing spurt in government bond yields is "irrational exuberance" and is driven by profit-booking despite the recent upgrade of India's rating by Moody's, says a research report. Defying "logic", the government bond yield has been on a roll of late and is hovering around 7 per cent, which is around 30-35 basis points higher than in the first half of FY18. Despite government remaining committed to fiscal prudence and Moody's upgrading the sovereign ratings a fortnight back citing structural reforms and growth revival, the bond market surprisingly is still not rallying, SBI Research report said. "Even as the equity and currency market are basking in the glory following the rating upgrade, the bond yields are surprisingly witnessing significant upward movement, which can only be defined as irrational exuberance and profit-booking," the report said. After the Moody's rating upgrade early this month to Baa3 with a stable outlook, some market players bought securities and now they are offloading them in the market, driving up yields, argued the report as the primary reason for the spurt in yields. The rise in bond yields is also due to unwarranted talks about rate hikes by the Reserve Bank as inflation remains sticky and may cross the 4 per cent mark in November, adding to bond market fears. In October, retail inflation inched up to 3.58 per cent from 3.28 per cent in September. "We believe such talks of rate hikes defies common sense, logic and are analytically self-defeating as we expect FY18 inflation to average at 3.6 per cent and at 4.4 per cent for FY19, both of which are well within targets," it said. As per the report, inflation is likely to stay in the 4.5-5 per cent range between January and June 2018, before declining to 4-4.5 per cent between July and December 2018.
