What stoked fear in the bond market

The benchmark gauge yielded 6.18%, its highest level since March 22.

When bond yields rise, prices fall.

The new benchmark paper, which will be introduced in a weekly auction this Friday, is likely to yield higher, raising overall funding costs, dealers said. It yielded 6.15% in the ‘When Issued’ market, a platform where a new benchmark paper is traded for price discovery before it is formally up for primary sale.

This means it yields 30 basis points more than the coupon on the outgoing benchmark series (5.85%), known as off-the-run in market parlance.

A basis point is 0.01%.

“A falling number of Covid cases have fuelled expectations of better economic recovery, although global crude oil prices are increasing,” said Devendra Dash, senior vice president AU Small Finance Bank. “These collectively are fanning higher interest rate expectations, especially when the RBI is trying its best to keep them under check. Likely additional borrowing due to GST compensation is also affecting sentiment on yields.”

Global crude oil prices rose to nearly $78 a barrel, stoking concerns of imported inflation. Withdrawal of localised curbs is increasing energy demand in India.

Overnight Indexed Swaps, a derivative matrix for interest rates onshore, touched a one-year high Tuesday. The two-year and five-year maturities yielded 4.49% and 5.51%, respectively, the highest levels this year.

“Exclusion of certain liquid papers from the GSAP, announced Monday, coupled with rising global crude oil price made bond dealers offload government bonds aggressively,” said Vijay Sharma, executive vice president for fixed income at

.

In the past few weekly auctions, the RBI devolved a particular series of papers with five-year residual maturity on bond houses, which have limited financial wherewithal to sustain long term losses.

It was expected that those bonds maturing in 2026 would be included in the Government Securities Acquisition Programme (GSAPs), a dedicated window for the central bank’s bond buying plan. It didn’t, raising concerns among primary dealers that rushed to sell.

“Today (Tuesday), RBIs choice of papers in the GSAP disappointed the markets,” said Sharma.

Five sets of sovereign securities will be part of the GSAP that is coming up this Thursday. None are considered liquid.

A week earlier, an ET poll conducted among 21 market participants pointed to a rise in the benchmark yield to a minimum of 6.25% by the end of the year.