Why yields on 10-year govt bonds have hardened so fast?

It seems as though the RBI policy has washed away all the optimism in the bond market. The 10-year yield has hardened from a closing of 8.19 percent  on Thursday (reacting to the FOMC dovish outcome) to levels of 8.7 percent intraday on Monday which means at current reckoning  the 10-year has hardened over 50 bps hardening in 1.5 days.

Why has the 10 year hardened so much and so quickly? Well, it began post the RBI policy where the surprise rate hike caught the markets off guard resulting in a negative sentiment that easing on the long end might not be in the foreseeable future. The 10-year at Friday’s closing hardened 39 basis points to close at 8.58 percent.

But the pessimism didn’t end there. On Monday the bond markets have a couple of things to grapple with starting with the most important one the 2HFY14 borrowing calendar. The FY14 borrowing program is pegged at Rs 6.29 lakh crore - 1HFY14 borrowing is already completed at 3.44 lakh crore hence as per traders anything above Rs 2.85 lakh crore (Rs 3.44 + 2.85 = Rs 6.29 lakh crore) will be a negative and anything below the Rs 2.85 lakh crore figure will be assumed to be a positive.

Other negatives that might be affecting bonds today is the supply pressure from the Rs 15000 crore bond auction scheduled today along with the continued negative sentiment from the RBI policy.

(Posted by Ekta Batra)