10-year bond yield hits three-year high

Benchmark Brent crude was trading at around $ 120.4 per barrel, up from the previous close of $119.72

Representational image.: File Photo.

TT   Correspondent   |   Mumbai   |    07.06.22  :  The 10-year bond yield soared to 7.5 per cent for the first time in over three years as global crude oil prices started to rise again – deepening the furrowed brows of the Reserve Bank’s policymakers who hunkered down for a crucial three-day meeting on Monday and grappled with the challenge of taming the country’s runaway inflation.

The benchmark Brent crude was trading at around $ 120.4 per barrel, up from the previous close of $ 119.72. The crude price surge sparked fears that the RBI may ratchet up interest rates more aggressively as they fight to control inflation.

Reflecting these factors, yields on the benchmark 10-year G-Sec hit a high of 7.51 per cent in intra-day trades. It later settled at 7.50 per cent as against the previous close of 7.46 per cent. Yields on the paper, which are inversely related to prices, had last touched this level on March 22, 2019.

Bond market experts are expecting a 35-50 basis points hike in the policy repo rate on Wednesday. The focus will, however, be on the RBI’s inflation forecast for this fiscal. In its April 8 monetary policy statement, the central bank had forecast inflation at 5.7 per cent in 2022-23. If the policy makers winch up their forecast sharply from this level, the market will read it as a sign that the RBI is turning hawkish – and that could hurt bonds.

Concerns over high inflation and consequent monetary policy actions has already resulted in domestic bond yields rising from a level of 6.89 per cent early in April to 7.49 per cent on May 9 after an off-cycle policy meeting that saw the RBI raising the repo rate by 40 basis points to 4.40 per cent and the cash reserve ratio (CRR) by half a percentage point to 4.50 per cent.

Bond yields have also been elevated as the government has announced a record borrowing programme. The Centre is set to borrow a gross amount of Rs 14.31 lakh crore in this fiscal of which around 59 per cent will be front loaded in the first half.

There are apprehensions that the Centre may have to borrow more from the markets as it will have to come out with more fiscal measures (leading to revenue losses) to control inflation. This will also ensure that yields stay elevated. Experts added that if the government beefs up its borrowing programme, the yield on the 10-year bond could move move closer to the 8 per cent mark this fiscal.

A surge in the bond yield is bad news for both the government and corporate borrowers since it raises their borrowing costs.

G-sec yields are used as a benchmark for various debt instruments. Banks would also see the increasing yields resulting in mark-to-market losses in their portfolio.

According to a recent note from Kotak Institutional Equities, the sharp increase in global and domestic bond yields over the past few months would suggest that the market is already pricing in high inflation over the next few months. The brokerage added that in its base-case scenario, a CPI inflation of 7-8 per cent (well above the RBI’s upper limit of 6 per cent) is expected over the next 5-6 months.

“We expect average inflation of 6.4 per cent in 2022-23 and end-fiscal year 2023 inflation at 4.6 per cent,” the report added.

It must, however, be remembered that the RBI in its April forecast had said inflation at the end of the fourth quarter (Jan-March 2023) would be 5.4 per cent – which is considerably higher than the Kotak estimate.