Currently the new 10-year benchmark 7.26% 2033 is trading at the yield of 7.39% while 7.26% 2032 is offering a yield of 7.42%. However, g-sec yields are likely to move up from current levels driven by various domestic factors such as higher market borrowing, policy repo rate hike, deficit system liquidity, elevated inflation level and global factors such as Fed rate hike and UST yield levels.
Market Borrowing- Since FY21, the Union Government has been borrowing heavily from the market to mitigate the economic downturn caused by the corona pandemic. For FY24, gross market borrowing has been budgeted to stand at Rs 15.45 trillion while net market borrowing is estimated at Rs 12.3 trillion for FY24. Including SDL borrowing, gross market borrowing is likely to stand at Rs 25 trillion in the next fiscal year. Consequently, the bond market will want higher yields to absorb this amount of borrowing.
Policy rate hikes and deficit system liquidity-In last policy meeting, RBI has hiked policy repo rate by 25 bps with tightening monetary policy. It has indicated further rate hike in the coming days. Driven by tight monetary policy, system liquidity has become deficit which is likely to be in the deficit zone in near future. Eventually this will lead to gilt yield to a higher level from the current level.
Consumer inflation- During Jan 23, consumer inflation rose to 6.52% from 5.72% in the previous month. RBI has pegged consumer inflation at 5.3% for FY24 which is higher than target average inflation rate of 4%. Core inflation has been at an elevated level of 6%. Therefore, higher inflation is expected to put upward pressure on g-sec yield level.
High Current Account Deficit and depreciation in rupee-India’s current account deficit was at 4.4% of GDP in Q2FY23 as compared to 2.2% of GDP in Q1FY23. Widening current account deficit may cause further depreciation in rupee value which will prompt central bank to continue rate hikes in coming days. Going ahead, in the view of global economic uncertainty and rate hikes by global central banks, capital flow is likely to remain unsteady. Consequently, the rupee may remain at a lower level.
Fed rate hike and uptrend in UST yield level- In the wake of high inflation, US Fed has continued its rate hike. In its last meeting, fed fund rate was hiked by 25 bps to 4.75%. Since Jan 2022, 10-year UST yield has moved to 3.94% from 1.63%. Owing to inflation and fear of recession, the US yield curve has been inverted. In the view of further rate hikes by the US Fed and inverted US yield curve, g-sec yield is likely to be volatile in an upward bias.
Government bonds, SDL and OIS yield movements
The new 10-year benchmark 7.26% 2033 yield rose by 2 bps to 7.39% while 7.26% 2032 yield rose by 3 bps to 7.42%. The 5-year benchmark bond, 7.38% 2027 yield increased by 5 bps to 7.39%. 3-year benchmark 5.63% 2026 yield increased by 3 bps to 7.31%. Long-term paper, 7.40% 2062 yield increased by 1 bp to 7.40%.
The spread of 10-year bond over 5-year bond increased to 3 bp from 1 bp as compared to the previous week. The 15-year benchmark over 10-year benchmark spread declined to 4 bps from 7 bps while the 30-year benchmark over 10-year benchmark spread came down to 1 bp from 3 bps on a weekly basis.
10-yr SDL auction cut-off yield declined to 7.71% from 7.72% in previous week while spread stood flat at 35 bps in previous week.
On a weekly basis, 1-year OIS yield rose by 4 bps to 7% while the 5-year OIS yield increased by 10 bps to 6.63%.
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