Range for 10-yr yield is 8.5-9% for next 2-3 months: HSBC

Bond yields hardened 4 percent yesterday on the back of monetary policy action, which happened on Friday, says Manish Wadhawan of HSBC. Markets were surprised with the 25 basis points repo rate hike and now there is a fear that another MSF reduction will be accompanied by further repo rate hike, he says.

He sees the yield for 10-year bond hovering at 8.50-9 percent for the next two-three months even if the RBI hikes repo rate by 25 basis points. Also Read: 10-year yield seen between 8.70-9%: Sandeep Bagla
Yesterday the Reserve Bank announced the second half of the FY14 borrowing calendar. The H2 FY14 borrowing programme will close in the first week of February. According to Wadhawan, 27 percent of the bond auction yesterday remained unsold because the market over-reacted to the news that borrowing would increase by Rs 50,000 crore. Below is the verbatim transcript of Manish Wadhawan's interview on CNBC-TV18 Q: How would you read yesterday’s development? The fact that 27 percent of the bond auction was unsold and the fact that the yield hardened 4 percent?
A: Yesterday it was a reaction to the monetary policy which happened on Friday. Market was surprised by the 25 basis point repo rate hike which a lot of people were not factoring in and it has created further fear that there could be further repo rate hikes in the offing as he reduces the MSF rate.
Besides that there was also one of the important factor that the borrowing programme was suppose to be given yesterday evening after market hours. A news report few days back had pointed out that number could be Rs 6,29,000 crore for the overall annual borrowing which meant Rs 50,000 crore higher. So the combination of these two fears lead to that kind of a thing but markets are stable and markets would stabilise in the times to come. Q: What about the Rs 4000 crore devolvement that we saw yesterday – how much of an impact did it have on the bond yields?
A: Markets have been very volatile. As we have seen the kind of yields movement. We were trading at 8.20 percent on 10-year bond yield before the policy and the yields have gone up to something like 8.75-8.80 percent range now.
The devolvement happened there was fear in the market about what would be the borrowing number for the second half which has come on the expected lines so yields have stabilized a bit but definitely the big picture is there remaining that there could be another repo rate hike whenever RBI reduces the MSF.
I would say that I think the markets are over reacting on this side also. Before the policy, yields were at 8.20 percent on 10-year bond and today we are talking of 8.80 percent. I think even with the repo rate hike of another 25 bps, the range could be for the next 2-3 months between 8.50-9 percent on 10-year bond. They are settling at the new range and even with the expected repo cut. Yesterday I would say it was a blip and these are very normal things and because of the reaction post a policy, when the repo rate was not expected it definitely surprised a lot of market participants. Q: In that case is there a risk that the yields go to 9 percent again or you don’t see that happening?
A: I would say again the same thing. The range I see for the next three months is at least between 8.5-9 percent on 10-year bonds. The second half borrowing schedule which has been given by RBI yesterday is on expected lines, there is no big surprise on that.
The important factors to look forward to are - how does the rupee behave in the next few months? How much of flows do we get on FCNRB in the banking capital? How do the equity markets behave - so it is dependent on a lot of factors.
Another important thing to be noticed would be how would inflation numbers come so if everything is falling on expected lines then I would stick to this that the range could be between 8.5-9 percent for the next 2-3 months.