Bond yield eases marginally after hitting over 2-week high

bonds

The yield on the 10-year benchmark bond eased marginally after hitting an over two-week high in the morning on buying by banks amid attractive prices and better-than-expected cut-offs at state development loan auctions, dealers said.

“At these levels, most investors are buying as they find it attractive. There is also some short covering by traders, which resulted in easing yields,” a dealer with a state-owned bank said.

“Later in the day, when the WPI (wholesale price index) number came in at a two-year low and brought some comfort, yields retraced 3-4 bps and now the market is keenly awaiting further guidance by looking at the US inflation number. If that moderates, it will be a bit comforting,” said Ajay Manglunia, managing director at JM Financial.

The benchmark 7.26 percent 2032 bond yield touched 7.4060 percent in the morning on February 14 – the highest since January 30, 2022, – and then eased to 7.3778 percent.

The 10-year bond yield ended at 7.3692 percent. Bond yields and prices move in opposite directions.

At the state development loan (SDL) auctions, the cut-off was set below market expectations. The market expected the cut-off on the 10-year SDL at 7.70-7.71 percent, but it came in 1-2 basis points below that.

Also read: Retail inflation gallops to 6.52% in January, increases possibility of another rate hike

One basis point is one-hundredth of a percentage point.

Yields rose sharply after consumer price inflation in January hit a three-month high of 6.52 percent, compared with 5.72 percent in December, driven by a significant increase in cereal prices and stickiness of core inflation.

Retail inflation returned to the 6 percent-plus territory after two months. CPI inflation has stayed above the medium-term target of 4 percent for 40 months in a row.

The biggest increase in food prices on a month-on-month basis was in cereals, eggs, and spices. Also on the rise were prices of meat, fish and milk.

Also read: January inflation shocker sparks fears of another RBI rate hike in April

Economists anticipate another rate hike by the Reserve Bank of India.

“The preliminary estimate for February CPI inflation is tracking at 6.5 percent, after incorporating daily food prices for the first half of the month. Inflation in Q4FY23 is now expected to average at above RBI’s upper threshold of 6 percent v/s RBI’s estimate of 5.7 percent,” IDFC First Bank said in a report. “Post the January CPI print, chances of a 25 bps hike in April 2023 have risen.”