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The bond market continues to wait for the much needed support from the central bank even as yields nudged the 6.4 percent-mark again this week. The benchmark yield closed the week at 6.39 per cent, up four basis points from the previous week.
One of the two contributing factors to the rising yields -- the US treasury yields -- did soften this week. The 10-year US treasury yield came down all the way to 1.55 per cent last week from 1.64 per cent the week before. However, crude prices, that have been keeping pressure on the domestic bond yields, continued to remain at the higher levels last week. Brent price crossed $86/barrel before closing the week near the $84/barrel mark.
Higher cut-off
Moreover, the cut-off rate on the variable rate reverse repo auctions continues to remain high. The central bank conducted a seven-day VRRR auction wherein the cut-off came in at 3.99 per cent. Earlier this month, the cut-off on a seven-day VRRR auction had come in at 3.61 per cent. The RBI has also announced a 28-day VRRR auction next week, indicating a higher tenor. Market participants say although the central bank’s stance on liquidity was made clear during the monetary policy and a hike in quantum was expected, an increased tenor does not help under the current market conditions where nothing is helping the yields.
Vijay Sharma, Senior Executive Vice-President at PNB Gilts opines that the RBI's support to bond market is missing currently. “Recently, there was an announcement for VRRR auction that had a higher tenor of 28 days. All this seems to indicate that the central bank is still not uncomfortable with the current level of yields. The market has lost its momentum and till the point in time that you see a helping hand from the RBI, you may continue to see the yields at these levels. The market did attempt a recovery but lost its mojo quickly. With each and every day that the central bank is delaying its comeback, the chances of 6.4 per cent level on the benchmark yield getting breached are increasing. The only thing that was finding some sort of favour from the market was the floating rate bonds. With the central bank conducting a massive switch auction, even the demand for FRBs have taken a hit," he said.
Next week, bond markets across the world will be keenly eyeing the US Fed meet where it is expected to announce unwinding of its bond-buying programme.