Bond yields hit 3-year high

Tuesday 20, June, 2006 Interest rates are hardening. The yield on the benchmark 10-year Government paper rose by 10-11 basis points on Monday to touch 7.91 per cent, which bond dealers said is the highest in three years.

Dealers expect the yield to go up to 7.97-7.98 per cent by Thursday and may settle down at those levels.

The bond prices fell by 60-70 paise after the Reserve Bank of India increased the amount of the Government securities auction from Rs 5,000 crore to Rs 9,000 crore on Friday, they said.

This was seen as a move by the central bank to drain the excess liquidity as part of its inflation management measures.

RBI had raised the short-term interest rates (reverse repo and repo rates) by 25 basis points earlier this month as a measure to curb the inflationary pressures following the hike in the prices of petroleum products. During the week ended June 3, the wholesale price index (WPI) based annual inflation rose 4.72 per cent, higher than the previous week's level of 4.68 per cent.

A dealer with a private bank said, "RBI is gradually sucking out liquidity as the M3 growth (money supply) is rising again."

"By increasing the auction amount to Rs 9,000 crore, when the market does not have appetite for even Rs 5,000 crore, RBI is showing it is comfortable with the yields going up," the dealer said.

Although RBI has set the target for inflation this year between 5 per cent and 5.5 per cent, some bankers feel that it could cross 6 per cent this fiscal.

"Prices of household goods such as foodgrains and vegetables are rising and the effect of oil price rise is not yet complete. So, inflation could rise further," said a senior treasury official from UTI Bank.

"In May, however, inflation started looking up and is now at 4.7 per cent. It is bound to rise further as a result of first and second round effects of the recent decision by the Government to hike oil prices," said a Crisil report on the impact of the rate hike by RBI.

The 7.59 per cent-10 year-2016 benchmark paper opened on Monday at Rs 98.07 (7.87 per cent YTM) and ended trade at Rs 97.82 (7.91 per cent) 70 paise lower from Friday's close of Rs 98.56 (7.80 per cent YTM).

The 9.39 per cent-5 year-2011 benchmark paper opened at Rs 107.85 (7.49 per cent YTM) and ended at Rs 107.64 (7.54 per cent) down from the previous close of Rs 108.07 (7.44 per cent YTM).

Although a further rate hike in the mid-term policy in July seems unlikely, some more measures by RBI to suck out liquidity cannot be ruled out, said market participants.

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