personal finance

Bond market gets a licence to thrill

Mumbai: Yields on the benchmark 10-year government bond fell to an intraday low of more than 31 months as slowing growth and reined-in prices underscored expectations of further interest rate cuts by the central bank. The trend should help companies borrow cheap, possibly boosting investment, a critical contributor toward economic revival. Total traded volume nearly doubled on Tuesday.

The benchmark gauge dipped to 6.31 per cent, the lowest since December 7, 2016, when India implemented a currency swap programme to reduce cash in the system. It closed at 6.33 per cent on Tuesday, 10 basis points lower than a day earlier.

Bond prices rise when yields fall. One basis point is 0.01 percentage point. “The bond market is repricing to new realities of the economy ranging from soft inflation to lower growth,” said Sandeep Bagla, associate director, Trust Capital. “Yields are adjusting accordingly, as signs of aggressive selling pressure has faded away with bullish bets kicking in.”

The market expects a further decline in yields in the absence of signals to the contrary.

“A persistent drop in core inflation figures is sending signals of prolonged softer rate regime,” Bagla said. Yields have been declining over the past few months as growth has slowed and the central bank has lowered policy rates to help revive the economy.

A leading conglomerate is said to have bought a sizable amount of sovereign securities on Tuesday, adding to the demand, possibly following the aforementioned reasoning that interest rates are likely to be cut further. Public sector banks, which had earlier purchased bonds at higher yields, are said to have booked profits.

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Overseas banks were also net buyers. They net bought Rs 4,081 crore of 10-year paper in the money market on Tuesday, compared with their domestic counterparts in the public and private sectors — they net sold Rs 3,736 crore and Rs 2,903 crore of the instruments, respectively. The total traded volume on Tuesday was Rs 1.38 lakh crore against Rs 74,560 crore on Monday.

Factors such as the budget proposal to raise a portion of sovereign debt from the overseas market for the first time, the central bank’s liquidity surplus and a possible global slowdown may have buoyed money market investors to go bullish, causing yields to drop.

“These indicators signify a softening economy,” said K Harihar, treasurer at FirstRand Bank. “There is a sense among bond market investors that factors such as slowing down of car sales coupled with weak economic indicators will prompt the central bank to take at least two, possibly even three rate-cut actions.”

As per government data released Monday, inflation based on the Wholesale Price Index (WPI) and core inflation in June softened to two-year lows of 2.08 per cent and 4.1 per cent, respectively. Inflation as measured by the Consumer Price Index (CPI) accelerated to 3.18 per cent from 3.05 per cent in May, according to data released on Friday, within the central bank’s target range. Moreover, recently announced June trade data showed a contraction in imports by 10 per cent, suggesting weakening consumption demand. That has prompted economists and money market investors to expect that the central bank may take further rate cut action at the next few monetary policy announcements.

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The banking system is said to be flush with cash of more than Rs 1 lakh crore, making for easy liquidity conditions. Since January, RBI has cut the repo rate by a total 75 basis points (bps) in three announcements. These were aimed at making loans cheaper for investment and consumption, key drivers of growth. The repo rate is the rate at which banks borrow shortterm money from the central bank.

The sovereign yields for almost all major economies have eased over the year amid global economic uncertainty owing to trade skirmishes between the US and China and geopolitical tensions related to Iran.

“One-fourth of the global yields this year have gone towards the negative side,” said Lakshmi Iyer, CIO, debt and products, Kotak AMC. “If all these points are put together in a grinder, it clearly points towards lower interest rates in coming months, which is exactly what bond markets are pricing in right now.”

Bond market participants said that given current indicators and certainty that the central bank will cut rates, yields may continue to slide and even breach the 6 per cent mark by the end of the current fiscal year. “We’re of the opinion that 50 bps (will be) cut through till March 2020 and if that is to be the case, fundamentally the yields will fall below 6 per cent,” said Iyer.


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