Bonds can cross 9% if US jobs data disappoint: BofA

Jayesh Mehta, MD and Country Treasurer, Bank of America believes the real investors will take another six-eight weeks to bring back money in India. According to him, so far the only money supply that was coming in the country was through foreign flows, who are more dependent on the forward rates. But with the forward rates getting high, the FIIs may cease to invest in India further, he adds.

In an interview to CNBC-TV18, Mehta says BofA is not selling bonds, but fears that if the US data on Friday disappoints, the yields may cross 9 percent.

Below is the verbatim transcript of Jayesh Mehta’s interview on CNBC-TV18 Q: Where do you think the 10-year yield is headed and why are we seeing so much spike?
A: There are three things happening together, one, you have October, November Open Market Operations (OMO) starting. People have given up hope on OMO and that would reduce your weekly supply. With this current year, we have weekly supply of Rs 15,000 crore every week. Secondly, there is some fear among people that Reserve Bank of India (RBI) is targeting consumer price index (CPI). If they are targeting CPI then the yields should be much higher.
Thirdly, in absence of OMO we need new buyers. The new buyers which we think are still foreign institutional investors (FIIs) what RBI is looking at, but they are going to take some more time to come in. When we talk of FIIs there are two types of FIIs, traders, arbitragers, they are more dependent on the forward rate. Now, the forward rates are so high that it is not getting attractive for traders and arbitragers.
As far as the real money guys are concerned, when we announced the withholding tax in May and the whole May to September was completely washout because of the global tapering and no tapering happening, people are now looking at it so they are in the process of registering so that will still take six-eight weeks before the real money guys are actually set up to invest in India. So these are the factors driving it. People were expecting that call money would come down to repo levels, it is still 8.20-8.30. Again today you have this service tax outflow of Rs 22,000 crore. Q: Do you think we will get to 9 percent before an OMO is announced or something happens, even at these levels are you selling bonds?
A: We are not, but we are not the only one in the market. There are not enough buyers and people are also reducing positions before the US data tomorrow and there are no fresh buyers if you look at it with the auction supply tomorrow. So tomorrow is going to be a crucial date, then it depends whether it crosses 9 percent or not but the way it is falling today it is dropping very rapidly.