10-year bonds rally from 3-month low as RBI brings in 'Operation Twist'

Benchmark 10-year bonds rallied from near a three-month low after the central bank said it will buy longer-tenor bonds while selling shorter debt in a move reminiscent of the US Federal Reserve’s Operation Twist.

The Reserve Bank of India will buy 100 billion rupees ($1.4 billion) of the 6.45 per cent 2029 debt and sell an equal amount of notes maturing next year in an auction on Monday, it said in a statement.

The yield on the 2029 debt dropped as much as 15 basis points to 6.60 per cent, the most in more than two months. The 7.57 per cent 2033 yield also slid 15 basis points. Shorter bonds fell with the 7.32 per cent 2024 yield rising 16 basis points to 6.67 per cent.

The move had been suggested by some traders and strategists as a way to pass on more of the central bank’s five rate reductions this year to businesses and individual borrowers. With investment and consumption both weak in India, policy makers are trying to spur credit and lift growth from a six-year low.

“This will address the steepening yield curve to some extent,” said Paresh Nayar, currency and money markets head at FirstRand Ltd. in Mumbai.

The concept is similar to Operation Twist used by the Fed in 2011-2012 in an effort to cheapen long-term borrowing and spur bank lending. The Fed then swapped short-term Treasury securities for longer-term government debt, which reduced the gap between two- and 10-year yields.

In India, the term premia -- difference between the benchmark 10-year yield and the RBI’s policy rate -- stands at 160 basis points, higher than the typical spread of less than 100 basis points.

The high yields in the longer end reflect concerns about the government adding to record borrowing as it gets ready to prime the economy. The slowdown has reinforced doubts about the administration meeting its budget aim of 3.3 per cent of GDP this fiscal year.

“The RBI should increase the intensity of its Operation Twist via more vigorous switches of government bonds focused on securities in the tenure of 7-10 year plus,” said Madhavi Arora, economist at Edelweiss Securities Ltd.

Not all agree the RBI’s move will work. Selling shorter bonds may blow up yields given the concentration of trading positions in that segment, ICICI Securities Primary Dealership Ltd. said in a note.

Also, while the RBI may pull down long-term yields, abundant cash in the banking system totaling 2.4 trillion rupees will cap shorter yields.