Yields at 3 year high: Experts analyse the way ahead

Anant Narayan, MD- Regional Head of fixed Income & Currency Trading - South Asia, Standard Chartered Bank and Nagesh P, chairman and managing director of Oriental Bank of Commerce in an interview to CNBC-TV18 gave reading and outlook for the bond market.

The 10-year benchmark government bond yields jumped to the highest level since August 2008 as investors declined to buy government bonds at last week's auction. According to Narayan, market will take cues from what happens in the credit policy and beyond that what happens on the fiscal front. Given the last quarter of this fiscal, he expects inflation to ease and translate into a little lighter monetary policy. He sees bond yields coming back to 8.5% by March of 2012. But, if there are indications that monetary tightening is not over yields could shoot towards 8.80-8.85% even 8.90%. Meanwhile, Nagesh P feels that the market has already factored possible 25 basis point hike by RBI. "Technicals indicate that 10 year bond yields are likely to go up to 9.10% which is indeed frightening." If rate hike is paused Nagesh expects to see some rally in the market and rates to settle down about 8.5%. Below is the edited transcript of the interview. Also watch the accompanying videos. Q: 8.74% in all probability an ugly inflation number on Friday and Rs 13,000 crore of further bonds to be sold by the government. The first one is devolved to the extent of nearly a Rs 1,000 crore so where do we see yields going even by the weekend? Narayan: A lot of bad news has been digested by the market over the last few days ever since the shocker of an increase in second half borrowing program came through. Unfortunately, we still have some negatives to look forward to. We have a monetary policy coming up in aftermath of what looks like being one more poor print on the inflation front. We have liquidity which will likely tighten up as we head up towards festival and Diwali season. There are lingering concerns about what the final fiscal deficit. All this will keep the markets nervous. We have seen 40 basis point move up in yields since the shocker of an announcement so hopefully some amount of digesting has happen. We should take a respite here. Having said that, market will take cues from what happens in the policy and beyond that on the fiscal front. I expect that given the last quarter of this fiscal should see inflation easing. It should hopefully translate into a little lighter on the monetary policy. With loan growth being slightly anemic as of now as busy season hasn