Bond yield climbs to four-month high as OIS market eyes year-end cut

Business Standard

a day ago

Government bond yields surged by another five basis points on Tuesday as stop-losses were triggered, prompting heavy selling likely led by mutual funds, while higher-than-expected cut-off yields at the state development loan (SDL) weekly auction weighed, said dealers.
The benchmark 10-year government bond yield settled at 6.49 per cent, the highest since April 3, against the previous close of 6.44 per cent.
Despite retail inflation hitting its lowest level in eight years last month, the sell-off in the bond market continued on Tuesday. The yield on the 10-year benchmark government bond had risen by three basis points on Monday.
Traders said inflation relief will be short-lived, given the Reserve Bank of India's (RBI's) projection of a sharp pickup in inflation in the first quarter of the next financial year, weighing on expectations of additional rate cuts. The RBI has projected CPI inflation at 4.4 per cent in Q4 of FY26 and 4.9 per cent for the first quarter of FY27.
'The market perceived the MPC stance as a hawkish pause as against the expectation of either a dovish pause or a hawkish cut. This killed any hope of a rate cut in the coming months. On top of that, there is more than Rs 50,000 crore of supply of central and state government bonds hitting the market every week, and with investment and trading books already under stress, the capacity to absorb fresh issuance keeps shrinking. There is no expectation of further open market operations from the RBI, so buyers are reluctant to step in,' said Vijay Sharma, senior executive vice-president at PNB Gilts.
'The biggest puzzle is that OIS is pricing in at least one rate cut, while the bond market is behaving as if a hike is coming. In the end, it all comes down to demand and supply, and right now, supply is overwhelming a market that is already under strain,' he added.
While the benchmark bond yield has risen by 12 basis points in August so far, the five-year OIS rate has fallen by five basis points during the same period.
Overnight indexed swap (OIS) rates suggest at least one rate cut by the RBI's Monetary Policy Committee before the end of the calendar year. This expectation is influenced by factors such as easing inflation and concerns over economic growth, especially on Indian exports due to recent US tariff measures.
However, some market participants believe that the decline in OIS rates may be more related to expectations of falling US Treasury yields rather than an imminent RBI rate cut. They suggest that this trend is primarily driven by offshore activities, particularly in response to the US imposing a 50 per cent tariff on certain Indian goods.
Meanwhile, worries about higher government borrowing in the latter half of the current financial year are growing, on the back of relief measures by the government after the imposition of tariffs.
'The yield on benchmark 10-year government bonds has risen since the rate cut in June, which means we can see the opposite impact of a rate cut in the G-sec market,' said a dealer at a primary dealership. 'The movement in the OIS market is purely offshore activity. The bets are that growth numbers are not very encouraging, which has led people to discount a 25-basis-point rate cut by December,' he added.
Since the 50-basis-point rate cut in June, the benchmark bond yield has risen by 25 basis points, while the five-year OIS rate has risen by seven basis points during the same period. The one-year OIS rate has fallen by two basis points since June 5.