NRI Dunia
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G-Sec yields harden

Yields on the benchmark 10-year bond on Friday breached the 6 percent mark as elevated retail inflation led to concerns that the Reserve Bank of India (RBI) will continue with its pause on interest rates.

The fall in government security prices (yields are inversely related to prices) comes at a time the corporate bond segment is showing some life with players such as Patanjali Ayurved tapping the market.

While bond prices had come under pressure after the outbreak of the coronavirus, aggressive interest rate reduction by the RBI and enough liquidity from targeted long term repo operations (TLTRO) led to the softening of yields despite a Rs 12 lakh crore borrowing program by the government.

However, high retail inflation amid forecasts that it would stay elevated has led to yields on government bonds rising from around 5.8 percent last month. The RBI has not announced an open market operation (secondary purchases of bonds), which jacked up yields.

Yields on the benchmark 10-year bond on Friday ended at 6.08 percent. Incidentally, it came on a day RBI governor Shaktikanta Das told a television channel that room still exists for an interest rate cut. He reiterated that policy space remains and that the central bank is only keeping its arsenal dry to use it judiciously in the future.

Earlier this month, Das had said that after Operation Twist and TLTRO improved the liquidity situation, spreads of three-year AAA-rated corporate bonds over similar tenor government securities have declined from 276 basis points on March 26, 2020, to 50 basis points on July 31, 2020.

He added that spreads on AA+ rated bonds softened from 307 basis points to 104 basis points, while spreads on AA bonds narrowed from 344 basis points to 142 basis points over the same period.