Traders demand higher yields on 10-yr bond, RBI reject bids

Primary dealers were forced to take Rs 8254 crore out of the Rs 12,000 crore bonds auctioned at 7.34% yield after the RBI rejected bids for that amount.

Traders said the RBI action indicated that the central bank was not comfortable with higher yields though the devolvement may still not yields from inching higher.

“The market is already adjusting to a new reality after a policy which was more hawish than expected, a higher print for consumer prices and also higher US inflation. Yields are likely to stay elevated,” said Naveen Singh, head fixed income trading at ICICI Securities Primary Dealership.

He was pointing to the central bank’s commentary in the monetary policy earlier month that kept the focus firmly on inflation. More importantly the consumer price index rose to a three month high in January at 6.52% way above RBI’s outer limit of 6% increasing expectations of another rate hike.

Consumer prices in the US also were higher than expectations rising 0.5% in January, for an year on year gain of 6.4% again raising doubts on whether the US Federal Reserve will pause rate hikes this year.

India’s bond yields have reacted to all these uncertainties with the yield touching 7.41% on Friday before ending at 7.39%. Bankers said the range for bond yields has now been adjusted to a higher trajectory.”We are now looking at a 7.35% to 7.45% range rather than 7.30% to 7.40%. Though there is little chance of the benchmark yield touching 7.50%, yields will remain elevated. The market demanded higher yields for the 10 year bond as there is now little difference the five year and ten year at around 7.33%. The market will keep pushing for a higher 10 year yield,” said Arun Bansal, head of treasury at IDBI Bank.