Bond yields surge on buzz that PMO is opposed to sovereign bonds

Bond yields spiked up to 10 basis points (bps) on Thursday on news that the government could be dropping the idea of a sovereign bond issued in foreign currency. Subhash Chandra Garg’s transfer to the power ministry, from being economic affairs secretary, also fuelled the speculation, even as there was no official announcement on this.

Now the plan could be to raise rupee-denominated bonds. According to a report by news agency Cogencis, the Prime Minister’s Office (PMO) has asked the finance ministry to issue rupee-denominated bonds, instead of foreign currency bonds. The agency quoted an anonymous source saying the decision was taken after stakeholder feedback following the Budget. This would eventually mean that the dynamics of the borrowing would be very similar to what the local bond yields determine.

The yields on the 10-year bond closed at 6.51 per cent, after falling to 6.54 per cent in the intra-day trade. “If the plan is scrapped, then there is no reason for the bond yields to remain low. The dollars are not coming, and the rupee is not strengthening to that extent. And if the overseas plan is cancelled altogether, the bond supply is coming back to the domestic market,” said Devendra Dash, head of asset liability management at AU Small Finance Bank.

The bond yields have fallen about 100 bps since January, reacting to 75-bp policy rate cuts by the RBI since February. The market expects the RBI to cut rates by another 25 bps in the August policy.