The Indian bond market remained under pressure this week amid elevated crude oil prices and rupee volatility and indications that the US Federal Reserve may further hike its interest rates to calm inflation as fresh tension erupts in the Middle East.
On Thursday, the yield on 10-year US Treasury notes breached the 5 per cent mark for the first time since July 2007, Reuters reported. Although it fell from that level later, it was the biggest weekly gain since April 2022. Higher yields made bond traders in India cautious in their purchases.
Meanwhile, on Friday, the Reserve Bank of India (RBI) announced its weekly auction of Treasury bills (T-Bills) and State Development Loans (SDLs). The indicative yield for three-month, six-month, and 364-day T-bills are 6.92 per cent, 7.11 per cent, and 7.12 per cent, respectively. The settlement date is on Thursday, October 26, 2023.
Also, 10 states will participate in next week’s SDL auctions: Karnataka, Andhra Pradesh, Karnataka, Uttar Pradesh, Madhya Pradesh, Manipur, Rajasthan, Tamil Nadu, Maharashtra, Telangana, and Jammu & Kashmir. Maharashtra and Madhya Pradesh are offering the highest interest rates at 7.73 for SDLs maturing in September and October 2034, respectively.
Bond Market Outlook
Given that no timeline for interest rate reduction has been given yet by the RBI, the higher interest rate regime is expected to stay longer. Before addressing that issue, RBI wants to drain out the excess liquidity from the banking system to tackle inflation.
Says Venkatakrishnan Srinivasan, founder of Rockfort Fincap LLP, a financial advisory firm, “In its last MPC policy, RBI proposed to issue OMO (open market operations) sales to drain out excess liquidity, if necessary, to control inflation. Since then, the government and corporate bond yields spiked by at least 10-15 basis points across the curve. Adding to the distress, the elevated crude oil prices and rupee volatility continue to haunt the Indian bond market.”
Adds Srinivasan, “Even though the Indian bond market is majorly reactive to domestic factors, the changes in geopolitical situation and other external factors, including volatility in US Treasury yields, are affecting our bond market to some extent.”
Rockfort data shows the new 10-year government bond is currently trading at 7.37 per cent. Meanwhile, it is expected that RBI to increase its borrowing in the coming weeks.
“We expect it to trade within a range with an upward bias in yields. With the market expectation of OMO supply amounting to Rs 50,000 crores, it may keep the bond market yields under check,” says Srinivasan.
Bond Issuance
According to Srinivasan, most AAA issuers would like to wait for market stability before issuing corporate bonds. “Regular issuers are continuing their efforts to tap the markets at desired levels even though they are unlikely to accept the entire green shoe option,” he says.
Lower credit-rated issuances are on the rise due to a surge in credit growth. Consequently, they are borrowing from bond markets over and above the banking limits.
“With the changes in MLD taxation rules, HNIs are showing increased investment appetite for high-yield instruments. We can witness an increase in high-yield trades in the corporate bond market space, mainly in the BFSI (Banking, financial services and insurance) sector,” he adds.
The issuance of large-size corporate bonds is expected to remain sluggish for some time
