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Budget, inflation focal points: Yields surge 22 bps in 1 month

Uttar Pradesh, West Bengal and Bihar opted for auction of 10-year paper. UP’s 10-year yield shot up to 7.24 per cent from 7.15 per cent last week, while Bengal’s 10-year yield was up at 7.23 per cent compared with 7.14 per cent (last auctioned on January 4, 2022).

Written by George Mathew | Mumbai |
Updated: January 19, 2022 8:08:24 am
Bankers have already indicated that interest rates have bottomed out and the RBI is likely to tighten and normalise the policy in 2022 to tackle inflation. (File)

Bond yields are on the rise ahead of the Union Budget. While the yield on the 10-year benchmark bond closed near the two-year high at 6.63 per cent, showing a jump of 22 basis points in the last one month, yields spiked further at the Reserve Bank of India’s (RBI’s) State Development Loan (SDL) auction on Friday.

Uttar Pradesh, West Bengal and Bihar opted for auction of 10-year paper. UP’s 10-year yield shot up to 7.24 per cent from 7.15 per cent last week, while Bengal’s 10-year yield was up at 7.23 per cent compared with 7.14 per cent (last auctioned on January 4, 2022). Bihar’s 10-year yield was at 7.24 per cent and Goa and Manipur were sold at 7.23 per cent. On January 4, the 10-year yield was 7.10 per cent. The overall cost has gone up by 0.14 per cent.

Karnataka’s cut-off yield of 7.35 per cent on its 15-year bond against 7.31 per cent in last week’s auction while Telangana had cut-off at 7.34 per cent on its 12-year bond versus 7.18 per cent on January 4. Bankers have already indicated that interest rates have bottomed out and the RBI is likely to tighten and normalise the policy in 2022 to tackle inflation. On the other hand, corporate fundraising through bond issues has already fallen due to the rising yields.

“Bond yields are spiking upwards on concerns of inflation (oil prices going up contributing to this) as well as Budgetary concerns. The borrowing programme for the next year is under focus and with redemptions being around Rs 4 lakh crore, there will once again be a large borrowing programme,” said Madan Sabnavis, chief economist, Bank of Baroda.

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Yield on benchmark 10-year bond has shot up by 71 bps in the last 12 months. The rise in bond yields is expected to result in higher borrowing costs for the government. The situation has now become tighter as the borrowing programme is expected to be bigger next year. The size of gross government borrowing has proceeded at a pace that suggests that budget estimates will be adhered to, the RBI says.

“However, repayment obligations (difference between gross and net borrowings) of the central government indicate a significant uptrend going forward, implying that gross borrowing is likely to remain elevated notwithstanding fiscal consolidation,” the RBI said in the Financial Stability Report.

The quarterly weighted average cost of incremental government borrowing has inched up in line with market benchmark yield movements, it had said. Budget had projected gross market borrowing of Rs 12.05 lakh crore.

In the US, two-year yields, which track short-term rate expectations, leapt 7.5 bps and crossed 1 per cent for the first time since February 2020. Benchmark 10-year yields rose more than 6 bps to 1.8550 per cent, amid indications that global investors are preparing for the possibility of more aggressive tightening by the Federal Reserve.

According to Deepak Jasani, head of retail research, HDFC Securities, Asia’s share markets turned negative on Tuesday as two-year US Treasury yields topped 1 per cent for the first time in almost two years. European markets traded lower with technology underperforming amid concerns about faster tightening from the US Fed and rising yields.

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