Investor uncertainty: higher yields on the Fed’s position, tightening oil prices

Dealers expect each auction to put additional pressure on returns due to the cancellation and decentralization of primary dealers.

The benchmark bond yield jumped more than 9 basis points for the week ended Jan. 7 following a sharp rise in U.S. Treasury yields, hawkish minutes from the U.S. Federal Open Market Committee and ‘a sharp rise in world crude oil prices. Additionally, traders were disappointed after governments increased their bond borrowing in the January-March quarter and the absence of a new benchmark bond announcement by the Reserve Bank of India (RBI).

The benchmark bond yield 6.10% -2031, which traded at 6.4537% last week, broke through the psychological 6.50% mark and traded above 6.54% in the middle of this week. He finished 6.5423% on Friday.

“Currently, Indian bond yields are influenced more by external factors such as US Treasury yields and rising crude oil prices. As things calm down on the global front, we might see the markets focus on domestic inflation and the budget deficit. At the current level of yields, much of the negative seems already built in, ”said Pankaj Pathak, fund manager, fixed income at Quantum Asset Management.

The yield rose throughout the week following the sharp rise in benchmark 10-year US Treasuries after FOMC minutes signaled an earlier-than-expected tightening of monetary support and an expected rate hike in 2022 The benchmark 10-year US Treasuries jumped nearly 20 basis points since last week and ended at 1.73% on Thursday. Rising yields on US securities reduce the interest rate differential with emerging market debt yields, making the latter less attractive to foreign investors.

Brent crude prices rose after the unrest in Kazakhstan and the deteriorating political situation in Libya which affected supply. By the end of the Indian market hours, Brent crude prices were trading at $ 82.78 per barrel, up 0.96%.

On top of that, there was also uncertainty among investors after the market for government debt via bonds in January-March rose more than expected. The RBI last week announced a higher market borrowing of Rs 3.09 lakh crore for the States for the January-March quarter. “Yield should continue to come under upward pressure as markets worry about supply, including SDL, as we enter the budget session,” said Sandeep Yadav, head of fixed income at DSP Investment Managers.

Market participants expect the RBI to announce a new benchmark next week as the current 10-year benchmark bond reached an outstanding amount of Rs 1.5 lakh crore. Dealers expect each auction to put additional pressure on returns due to the cancellation and decentralization of primary dealers.

“The cancellation of the auction last week shows the RBI’s unease at the sudden rate hike. Thus, it is highly likely that the RBI will announce a new 10-year benchmark to show better numbers on the performance of the benchmark, ”Yadav said.

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Felix J. Dixon