Bond yields fall most since Sept 2020 as crude oil prices slide

26 Apr , 2022 By : Kanchan Joshi

MUMBAI : The yield on the 10-year government bond fell the most in 19 months as traders rushed to cover their short positions amid a drop in oil prices and US treasury yields. The yield fell by 12 basis points to 7.04% at the end of trading on Monday.

However, stocks fell for a second straight day over prospects of aggressive rate hikes by the US Federal Reserve. Future Group firms tumbled after Reliance Industries Ltd scrapped a proposal to buy its assets. The National Stock Exchange’s Nifty index declined 1.27% to 16,953.95, while the BSE Sensex shed 1.08% to 56,579.89.

Bond yields have been inching up this month after the Reserve Bank of India said it will pivot to fighting inflation. The yield on the benchmark 10-year bond touched a peak of 7.28% on 13 April as traders bet on an imminent rise in interest rates by short-selling bonds. Last Friday, the 6.67%, 2035 bond became the most short-sold paper with trades worth Rs12,303 crore on Clearcorp’s Repo Order Matching System.

A short sale entails selling a borrowed security with the intent to buy it later when prices fall. Short selling is an important tool for hedging against a rise in market rates.

However, the bets went awry as crude prices fell by almost 5% this week after IMF cut its world economic growth forecasts and the US 10-year Treasury yields fell the most in three years.

Meanwhile, state governments in India stayed away from borrowing from the domestic market following central transfers in March and a Rs1 trillion capital expenditure support announced in the budget. Only Punjab will raise Rs1,500 crore in an auction this week by issuing state development loans (SDL) this week.

Separately, aggressive buying by corporates was also seen in the 5-15 year papers last week. Traders also started unwinding their short positions, which led to a nearly 24 basis points drop in 10-year yields from the peak.

“Bond yields moved from 6.22% on 30 September 2021 to 7.28% by 13 April 2022 in approximately six months. So a retracement was inevitable. A significant correction in crude, no SDL auction as per schedule and reversal in US Treasury and huge short position built up in bond market coupled with risk-off sentiment globally, facilitated this fall to 7.04% level in 10-year from the peak of 7.28%," said Gopal Tripathi, head of treasury at Jana Small Finance Bank.

However, bond markets may remain volatile as investors are jittery about the heavy supply of bonds hitting the market and the US Fed’s aggressive policy tightening.“We expect the benchmark 10-year yield to trade in the 6.90-7.15% range in the near term," Kotak Mahindra Bank said in a report on Monday.