More Supply at Longer End, GST-Cut Proposal Keep Yields Elevated

On Friday, a large non-banking financial company, which is in the upper layer of the Reserve Bank of India's scale-based supervision list, postponed its bond issuance due to lack of investor appetite as yields stayed elevated.

- Manojit Saha & Anjali Kumari

A 15-year government security, introduced in early July, saw yields surging 25 (basis points) bps in a very short span.

Yields on state government bonds also hardened sharply. The 10-year SDL yield, which was in the range of 6.84-6.88 per cent in the first week of April, has climbed to 7.09-7.17 per cent as of August 19. The rise has been even sharper at the longer end, with yield on 30-year SDLs moving from around 6.87 per cent in early April to about 7.44 per cent in August.

Bond yields have surged across the board despite a 100 bps reduction in the policy repo rate since February, which included a front-loaded rate cut of 50 bps in the June review of the monetary policy.

A combination of factors—over supply of long duration bonds, fading hope of further easing of policy rates, recent proposal of cut in GST rates, and short position by investors—has resulted in reversing monetary transmission in the bond market. "The corporate bond market, the state bonds have become completely illiquid. If someone wants to sell, then they have to take a short position in the 10-year benchmark government bond, which further pushes up yields," said a trader from a large commercial bank.