Bond traders presage 10-year yield around 7.35-7.5%

With the government ruling out more borrowings in March, bond traders are mixed on the direction yields may take by March 31, a Crisil MarketWire poll showed.

While some saw the 10-year yield ending the current fiscal year at 7.35 per cent, others saw it rising to about 7.50 per cent from 7.43 per cent currently.

The poll asked 14 bond traders on where they saw the 8.07 per cent, 2017 bond, the surrogate 10-year benchmark, on March 31. The result showed that expectations ranged between 7.35 and 7.50 per cent.

The 10-year gilt""at 6.65 per cent on March 31, 2005""is key for investors for mark-to-market valuations for an accounting year.

The mixed views on the level at close of this year also reflect the divergent expectations on liquidity, dealers said. Traders who see the yields higher fear liquidity tightness worsening when the advance tax payments are made by mid-March. Those who see the yields lower are betting on a surge in spending by the government that in turn would boost liquidity.

"The 10-year yield may stay around 7.35-7.40 per cent at March-end. The liquidity drained through corporate advance taxes this month will return in April and this will ease (boost) sentiment," said Amit Bansal, head of treasury, Barclays Bank.

But a few others see difficult times in the immediate future, or in March-end, owing to corporate advance tax payments.

"It (10-year bond yield) would be 5 basis points up from the current level. People are very cautious. All are sitting on cash. They will wait for the borrowing program announcement for next year. They will look at global crude oil prices and advance tax outflows," said Laxmi Iyer, fund manager, Kotak Mutual Fund.

Bond yields have come under much pressure in 2005-06 (April-March): a year marked by rising global crude oil prices and interest rates, high credit growth, and liquidity squeeze.

According to dealers, yields could rise further despite the private placement of the 7.40 per cent, 2035 bond for Rs 10,000 crore by the Reserve Bank of India (RBI) on Monday.

"Yesterday's (Monday), private placement of bonds (with RBI) has not made much (positive) impact on the market," Iyer said.

This was reflected by the big profit sales that followed early gains today. Government had proposed to raise Rs 15,000 crore in March, but it privately place Rs 10,000 crore of a 29-year gilt and ruled out further borrowings.

The upcoming corporate tax outflows are seen pressuring yields up.

Most dealers expect an outflow of around 200 billion rupees towards advance tax, the last installment for companies this financial year.

The outflow could accentuate the tightness because the government expenditure has been slow.

The government had a surplus balance of close of 363 billion rupees, Minister of State for Finance Pawan Kumar Bansal said today.

The huge borrowings scheduled for the next financial year could also push up yields this month, dealers said.

The target for gross market borrowing through dated securities has been set at 1.53 trillion rupees, against 1.31 billion rupee borrowing made this year.

"The government usually covers around 60-75 per cent of its borrowing in the first half of the calendar," said a dealer at a state-owned bank.

"We see the most watched 8.07 per cent, 2017 between 7.47-7.50 per cent at March-end.

Yields may rise once the scheduled borrowing program is released," said Piyush Wadhwa, vice-president, ICICI Securities Ltd.

"In April alone we expect around 20,000 crore (200 billion rupees) of auctions because there is redemption worth 16,500 (165 billion rupees).

Investments could also be avoided ahead of the Reserve Bank of India's Annual Policy Statement in April, dealers said.

Market players have divergent views on the RBI policy too."Nervousness ahead of the RBI policy in April will also weigh because high credit offtake and money supply growth continues," Wadhwa said.

"If the present tightness in liquidity continues, along with the growth in credit offtake, expectations of a cut in banks' cash reserve ratio may rise. Such expectations will also check a sharp rise in yields," said Bansal.

During Apr. 1 to Feb .17, banks' credit off-take has risen 2.98 trillion rupees, against the 2.17-trillion-rupee rise in the same period last year.

The high growth in banks' credit, coupled with the slower rise in deposits has not only reduced liquidity it has also lowered gilt investments by banks.