 "India misses the bond party")
While global bond yields continue to fall, Indian bond yields are rising, irking a large section of domestic bond traders, who see their investments eroding fast, while anticipating a worse situation in the coming months.
Bond yields and bond prices are inversely correlated. That is, when bond yields rise, bond prices fall.
The Reserve Bank of India (RBI)'s monetary policy announced on Tuesday only annoyed traders as the central bank did not give any indication of salvaging the situation, but promised adequate short-term system liquidity. RBI governor Raghuram Rajan said the central bank was working on a new liquidity framework, but he did not divulge further details.
Still, the newly-introduced benchmark 10-year bond closed at 7.722 per cent on Tuesday, compared to 7.658 per cent on Monday. On Wednesday, too, the yields inched up to close at 7.728 per cent. The bond was introduced on January 8 with a coupon rate of 7.59 per cent. At 99.05 apiece, the bond has already lost close to 100 paise in value.
Compare that to the global bond yields, which till December were largely rising but are now falling. As a result, most global bond markets are rallying with bond prices on an uptrend.
The US 10-year bond yield is now trading at 1.866 per cent from 2.27 per cent on January 1. The German Bunds, which was a key indicator of a recent global bond rout, are now having a rally. From 0.589 per cent on January 12, the 10-year Bund yield is now at 0.30 per cent. Dutch yields have also fallen sharply so much so that the yields have gone to a negative territory. Dutch 7-year bond yields are now at -0.022 per cent, compared with a positive 0.263 per cent on January 1.
Even a much-maligned emerging economy, Turkey, has seen its bond yields fall. The yield to conversion of Turkey's 10-year euro bond is at 4.845 per cent now, from 4.992 per cent at the start of the year. Lira-denominated Turkish 10-year bond yields are now at 10.550 per cent, from 10.90 per cent at the start of the year.
In short, most bond markets or bond prices are rallying across the globe except for India.
"Not many expected a rate cut in the policy, but market was badly expecting RBI to assure the market that it would do frequent open market operations to cool off bond yields," said a senior bond dealer with a bank, who did not wish to be named.
That kind of assurance did not come in the policy. But, RBI said short-term liquidity needs would be met.
"Providing overnight liquidity support will match the system liquidity, but does not encourage medium term risk taking abilities," said Jayesh Mehta, head of treasuries at Bank of America Merril Lynch.
RBI had recently cancelled Rs 9,000 crore of treasury bond auction as the market sought higher yields following an incessant issuance from state and central government - amounting close to Rs 10 lakh crore. The cut-off in state government's bonds is also going up with every auction. From a normal 30-40 basis points, the cut-off is now more than 70 basis points above equivalent maturity central government bond yields.
"The situation is going to be worse when bonds under UDAY come up. The market probably never expected this kind of situation where 125 basis points rate cut pushes up bond yields further," said the head of financial markets of another foreign bank.
Open market operations (OMOs) provide liquidity support to the bond market. RBI has done Rs 20,000 crore of bond auctions under OMO, but has bought at least Rs 14,500 crore extra directly from the market to cool off bond yields.
But, that kind of targeted market intervention cannot work, according to bond dealers. What is needed is outright public OMO auctions as only that can provide liquidity in the bond market.
Liquidity
The short-term liquidity support, which RBI provided through term repo auctions recently was at close to 1.73 per cent of the net demand and time liabilities (NDTL), against RBI's own target of maintaining liquidity shortage at not beyond one per cent of NDTL.
Analysts pointed out RBI's balance sheet was not getting stressed because of the excess cash balance of the government that RBI was auctioning off.
For example, on February 2, the total liquidity injected in the system through overnight and dated repo auctions, was at Rs 1.35 lakh crore. On that day, the government's surplus cash balance meant for auction was at Rs 1.02 lakh crore.
This indicates RBI only injected about Rs 33,200 crore from its own, which is roughly 0.35 per cent of NDTL.
However, the call money rate continues to hover around the repo rate, which is what RBI's intended purpose is. Banks are not complaining about liquidity. But, it is a different story when it comes to bank treasuries.
"This time, the nature of liquidity need is quite different. Banks do not want liquidity support for their credit operations, but bank treasuries need to trade their bonds off with RBI to be able to invest more in fresh papers. That liquidity support is not coming from RBI," said one of the bond dealers quoted above.
